According to Western critics, the year 2000 is about to catch the Japanese financial sector by surprise. Not so, say officials from the Bank of Japan and Finance Ministry, although they admit Japan may be behind the U.S. in pushing private compliance with the so-called "year 2000 problem."
At issue are computer systems that use only the last two digits in the year in setting dates.
The systems assume that the first two digits are "19," and when the new century rolls in at the end of next year, those systems will recognize the year as 1900.
If that happens, credit cards will appear expired; interest, pensions, insurance annuities payments will be affected; and bond yields and taxes will be calculated incorrectly.
Doomsayers even warn of wide disruption to the financial system from stock-exchange paralysis to illiquidity caused by a failure of interbank transactions.
"Unless the year 2000 problem is addressed on a comprehensive, pre-tested basis, the entire Japanese financial system could be disrupted and in some areas grind to a halt," said Christopher Wells, who chairs the Banking and Securities Subcommittee of the American Chamber of Commerce in Japan.
Early this month, the American chamber issued a report saying that a lack of central coordination in ensuring compliance is liable to let some institutions slip through unprepared.
One slip, however, could be danger enough.
As one executive at a foreign-capital financial institution put it, the year 2000 problem is a "one for all and all for one issue."
In a worst-case scenario, a halt of clearance and settlement systems in the worldwide market could be caused by a single transaction from a noncompliant institution. The risk is systemic and thus individual institutions should not be left to resolve the problem on their own, warns the American chamber’s statement.
A Bank of Japan official, however, said, "Criticism that Japan is behind the West in year 2000 compliance is based on misunderstanding."
"The Bank of Japan has distributed a checklist that is compatible with Bank for International Settlement (BIS) standards for compliance," said one BOJ official. "We will begin testing BOJ Net, Japan’s largest clearance and settlement network system, from December 20 this year. Those who criticize Japan’s efforts seem to me to be lacking knowledge of these facts."
Preparations at Bank of Japan
BOJ Net hosts current accounts of 428 domestic financial institutions, 264 foreign-exchange accounts, and 450 government-bond settlement accounts, among 533 participating institutions, which is inter-connected with settlement systems of other countries. The online system handles ¥307.6 trillion ($2.3 trillion) of current-account transactions a day and ¥39.6 trillion foreign-exchange transactions a day.
The bank’s computer systems and network are expected to be compliant by January 1999, said the official. It has also recommended that companies participating in its network achieve compliance by the end of this year.
"We also plan street-wide tests, including other financial networks, beginning in April 1999. As far as I know, the only countries with fixed schedules for street-wide testing are Japan and the U.S.,’ the official said. "Where we are behind the U.S. is in urging compliance by individual companies."
The American chamber’s report contends there may also be a gap in testing procedures and contingencies.
Member companies, some of which are financial institutions, expressed particular concern that while most securities and cash settlements are done through one of three systems – BOJ Net, JBNet, and the JASDEC service – there is no authoritative information or central coordination for year 2000 compliance.
The chamber’s report claims no attempt has been made to include custodian bank settlement systems (cash only), in compliance standards. Chamber members were also worried about a lack of backup mechanisms to handle failed settlements.
"Soon, international institutions will need to make decisions as to whether Japanese intermediaries are sufficiently year-2000 compliant to be permitted to participate in the international financial system," the American chamber’s Well said.
The Bank of Japan official said that while the bank did not have legal authority to force companies to meet its standards, the Bank of Japan felt that testing should be compulsory for institutions that use its network.
That lack of authority was echoed by other Japanese institutions.
Tokyo Stock Exchange’s Tomio Amano, deputy director of electronic systems administration, said the exchange established its own compliance plan in 1995 but will not force members to pass it.
"We will finish fixing our transaction systems by the end of 1998. We can accept requests for point-to-point testing from October and begin testing in January 1999," said Amano.
The test will involve a virtual trade made on December 28, 1999 and settled on January 4, 2000.
"Through this test, member companies can check the result of trade, transaction, settlement and other data in their systems," said Amano.
No authority
"We plan to emphasize the importance of compliance to exchange members that do not participate in the first tests in January 1999, but we cannot force them to participate in the test," said Amano.
Takaaki Okada, international liaison at Japan Securities Dealers Association (JSDA), said, "We do not have the legal authority to enforce compliance among our members." JSDA is a self-regulatory organization of the securities dealers in Japan, as well as an operator of the JASDEC system, which is an online network for trading over-the-counter stocks.
He said the Japanese securities industry is a few months behind the U.S. in compliance. "For example, we are planning to have point-to-point testing in early 1999, but we have no authority to force our members to join the test," said Okada.
In contrast, the New York Stock Exchange will force companies to achieve year 2000 compliance to maintain good standing in the exchange.
U.S. government authorities are also taking a strong position. Regulators, including the Securities and Exchange Commission, the Office of the Controller of the Currency and the Federal Reserve System are undertaking comprehensive supervision of compliance by entities that fall under their jurisdiction.
Also, the Securities Industry Association has been planning for more than a year to conduct street-wide testing of financial institutions, exchanges and clearing houses.
Custodian banks are also ready to test year 2000 compliance. An official at Fuji Bank, which has the largest share in the domestic market, said the bank will be year 2000 compliant by June 1998.
Fuji Bank handles more than 4,000 transactions a day, out of 20,000 nationwide. "We plan to join the Bank of Japan’s settlement test by the end of this year, and we will conduct customer testing between January and March 1999," said the official.
He said Fuji Bank may join the street-wide testing by the Tokyo Stock Exchange or the Bank of Japan if necessary.
Japan’s Ministry of Finance is reluctant to introduce U.S.-style obligation to comply.
"The common perception among financial authorities of advanced economies is that each financial institution has to comply voluntarily. There is no plan for the administration to intervene or legislate compulsory compliance," said Tomoyuki Nakagawa, deputy director at the Banking Bureau of the Ministry of Finance.
"I believe Japan is not behind other advanced economies in compliance with the issue. Our compliance program has been accepted by financial authorities of other economies," Nakagawa said.
The American chamber, however, is not alone in its concern. A report from Moody’s Investors Service cites relatively low spending in Japan on year 2000 compliance compared with that of U.S. companies.
According to Moody’s report, a recent survey showed that 49 major Japanese banks planned to spend $249 million on year 2000 compliance, an amount that barely equals the spending plans of J.P. Morgan alone. Citicorp is spending $600 million on year 2000 issues.
A Moody’s analyst said, "It seems reasonable to ask, is (Japan spending) enough?"
