Cross-Shareholdings Decline for the 11th Straight Year (FY 2001 Survey)

Fumiaki Kuroki

1. Introduction

Compared to an earlier time when cross-shareholding relationships flourished， the environment today continues to change rapidly -- the comprehensive introduction of mark-to-market accounting for financial products (from April 2001)， decline in stock prices as seen by the Nikkei average's falling below 10，000 (in September 2001) for the first time since 1984， and the new law limiting shareholdings of banks (effective January 2002). Meanwhile， policies have been quickly implemented to prevent the rapid unwinding of cross-shareholdings from destabilizing the market -- exchange traded funds (ETF) were inaugurated in July 2001 to help invigorate the market， the Commercial Code was revised in October 2001 to lift the ban on treasury stocks， and the Banks' Shareholdings Purchase Corporation was established in January 2002. Furthermore， stocks purchased during specified periods are eligible for capital gains tax breaks.

The emergency economic policies announced in April 2001， which formally declared the shareholding restriction for banks， cited several objective --to ensure the soundness of banks by limiting the market risk of bank shareholdings within their risk management capacity， to vitalize the stock market， and to enhance corporate governance. This marked a departure from the previous policy， which focused narrowly on avoiding market turmoil from the unwinding of cross-shareholdings， and offered only temporary fixes.

With the decline in long-term shareholders， companies are increasingly being exposed to shareholders' proposals from active shareholders. Though not necessarily pleased by such intervention， corporate management must strive to earn the trust of institutional investors concerned about fiduciary duty.

In light of the environmental changes described above， this paper discusses the rapidly changing scene in cross-shareholdings based on the results of the Fiscal 2001 Cross-Shareholding Survey.