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«Good afternoon. The only item on the agenda for today is concerning the transition to a standardized trading unit. Please refer to the handout. ...»

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Notes on Media Briefing by Akira Kiyota, Director and Representative Executive

Officer, Group CEO, Japan Exchange Group, Inc., on December 17, 2015

Good afternoon.

The only item on the agenda for today is concerning the transition to a standardized

trading unit.

Please refer to the handout.

Following an erroneous order placed by Mizuho Securities a decade ago in December

2005, the FSA set up a council of experts.

The council proposed standardizing trading units at exchange markets, because complicated trading rules and market practices could pose a problem.

As a result, all stock exchanges in Japan formulated action plans to standardize trading units and have gradually transitioned to 100-share trading units since 2007.

The action plans encountered some temporary halts along the way in order to smoothly launch dematerializations of share certificates and in consideration of the impact of the Great East Japan Earthquake, but the number of trading unit types was reduced from eight lot sizes (1-, 10-, 50-, 100-, 1000-, 2000-share lots) in 2007 to two lot sizes (100- and 1000-share lots) last year, thanks to the understanding and cooperation of listed companies.

The transition to 100-share lots has continued to make steady progress this year.

About 73% of all listed companies currently trade in 100-share lots.

In the final stage of the action plan for consolidating the trading unit to 100-share lots, we conducted a survey on 1000-share companies. Based on the outcome, we set a deadline for them to complete their transition to 100-share trading units.

To give sufficient time to companies that may need to adopt resolutions at general shareholders meetings, the date will be set for October 2018.

I would like to express my sincere appreciation to the listed companies that have made the transition and request that 1000-share companies complete their transition to 100-share trading units in a timely manner.

The listing of the Japan Post companies last month and the scheduled NISA expansion are expected to drive more people to start investing in stocks. We hope the consolidated trading unit will help the market offer greater convenience to all users with simpler rules and practices.

Further information will be provided in a separate session at 4:30 p.m.

[Q&A] Q: I would like to ask you about the US interest rate hike. The market took on an upward trend today. Could you share your view on the impact of this rise in interest rates on the market and economy in the future?

A: The interest rate hike has been a significant issue for the FRB since former Chairman Bernanke hinted at the possibility of tapering, drawing a strongly negative reaction from the stock market in 2013. After discussing their most critical issues with the market, it took the FRB two years to finally raise the interest rate.

The FRB did not raisethe interest rate in September, when many of us thought they would, in light of the market disruption in China at the end of August. If they had taken into account only the conditions in the US economy, they may have raised the rate at that time. Uncertainty over when we would see a rise in the interest rate had dampened sentiment. Thus, now that the FRB finally raised the interest rate, things are looking up, as can be seen by the positive reaction in US, Japanese, European, and Chinese markets.

The FRB decided to raise its rates based on the facts that US economic indicators, including employment statistics, were extremely positive and that other indicators in general also showed positive signs, albeit we have to await the results from Christmas selling season. Chair Yellen mentioned that the FRB would only lift rates slowly, but that the policy would continue to be loose. As such, the market can still count on confidence toward US financial policy, including the pace at which they lift rates in the future.

One of the impacts on the Japanese market was that uncertainty subdued.

Sources indicated that it is unlikely that there will be another interest rate hike in the US through to next March, which, I believe, alludes to stability in one of the external factors that can potentially move the Japanese market.

The exchange rate, however, has been fluctuating nervously, going from JPY 123 to the JPY 120 level a few days ago, and then returning to the JPY 122 level after the US interest rate hike. When the interest rate rises, it can lead to greater differences in interest rates between the US and Japan. Thus, we temporarily saw the dollar strengthen against the yen. However, the yen did not depreciate as sharply as expected by some in the market, and the mild reaction indicates that there is no negative or positive impact on the results of Japanese companies and that the exchange rate reacted very reasonably to the interest rate hike. As the Tankan survey and other reports show, many listed companies have predicted that the exchange rate next year will reach JPY 119 levels. Thus, if the rate were to approach such levels, I believe it can spur an improvement in performance at Japanese companies.

In summary, though the US interest rate hike will not be a huge boost for the Japanese economy, it has cleared some uncertainty. Furthermore, Japanese companies seem to feel reassured by a situation where they can proceed with business operations overseas with relative ease.





Q: There are only a couple of weeks left this year. Could you give us your comments on the market this year and the outlook for next year? Also, what are your reflections on your first year as CEO?

A: The environment surrounding the capital market in Japan was very good this year. The Nikkei Average surged past the 20,000 mark for the first time in 15 years. The market capitalization of companies listed on TSE increased to JPY 620 trillion, exceeding its peak from December 29, 1989 at the height of the economic bubble.

Comparing the value at the end of last year and that of now, the Japanese market achieved one of the best performances in the world and the best among developed nations. If you look at the closing price today, JPY 19,353 is about an 11% increase compared to JPY 17,450 at the end of last year. No developed nations have achieved such a high rate, and we can say that the market has been enjoying favorable developments. However, as you know, when the Japanese market staged huge fluctuations due to rising risks in China, tension temporarily took hold among certain factions in the market. From a global standpoint, however, the Chinese market is a closed one; as such, its effect on markets in developed countries is minimal. Even when the FRB raised the interest rate, the Japanese market did not fluctuate and has settled down.

The Chinese stock price index has been in a lull after wild fluctuations. On August 24, 2015, the index fell by 297 points, a 8.5% decrease, and this significant drop in a single day certainly shocked the market.

The stock market in Japan also saw some adverse effects, as the Nikkei Stock Average plunged to below JPY 17,000 in September. Nevertheless, that is as low as said average went, as such a level was already too low to reflect the actual performance of Japanese companies.

On December 1, the Nikkei Stock Average recovered JPY 20,000 levels, eliminating concerns over market instability.

Overall, the market remained stable and favorable throughout the year, and IPOs also remained strong. Last time, I said the number of IPOs was expected to be 99 nationwide, but as one company cancelled its listing yesterday, the number will be 98.

Looking back at the 80 IPOs from last year, we can say that the IPO market maintained its upward movement this year, too.

On a related note, this spring, we came across some inappropriate actions by the management of IPO companies immediately after listing, which could undermine the confidence of shareholders and investors toward IPOs. On March 31, President Sato of JPX-R, and I, then President of TSE, requested the Japan Securities Dealers Association (JSDA) and the Japanese Institute of Certified Public Accountants (JICPA) to work together to strengthen underwriting examinations, audits, and listing examinations. The measures have proven effective, and JPX will continue preventing such inappropriate actions while working with all those involved and with market participants to attract more companies for listing. We are committed to preventing inappropriate and unfair transactions and inappropriate disclosures.

On June 1, 2015, the Corporate Governance Code started to take effect across all companies listed on the TSE market. Companies on the 1st and 2nd Sections are required to adopt all 73 principles, while emerging companies on Mothers and JASDAQ are required to adopt five basic principles. Under the comply-or-explain regime, listed companies are required to strengthen their governance and to explain if they are unable to comply. Issues with governance cannot be solved overnight, but we also learned that the code should not be merely superficial.

Though the incidents in Toshiba, which occurred long before the enforcement of the corporate governance code, came to light this year, this does not undermine the significance of implementing the Code. We hope that, through the process of implementing the corporate governance code, management at listed companies can once again give serious thought to what corporate governance should really be. If they carefully examine the 73 principles, they can see clearly what is and is not required. Even if they cannot comply, they can provide a valid explanation to fulfil their requirements. I believe everyone has now come to fully understand this mechanism.

Moving on, JPX renewed arrowhead on September 24. The previous arrowhead was developed in 2005 following the erroneous order placed by Mizuho Securities that I mentioned earlier. The first generation arrowhead was replaced by the new one this year. We are very pleased that the upgraded system has demonstrated stable performance even during periods of high order traffic and wildly fluctuating market prices. When the three Japan Post companies went public in tandem, the system smoothly processed the massive orders that ensued.

I would like to briefly touch upon the topic of the Yangon Stock Exchange (YSX) established in Myanmar, an event that has been covered in the media since last week. Over three years have passed since JPX started to assist in the establishment of YSX. To celebrate the event, a great inauguration ceremony was carried out, counting on the attendance of Myanmar's Vice President, Minister of Finance, and other dignitaries, as well as Japan FSA Commissioner Mori, President and CEO Hibino of Daiwa Securities Group, President Fukai of Daiwa Institute of Research, and TSE President & CEO Miyahara. There are no listed companies at present, but listing examinations are underway, and trading will start in the future.

Our hope is that companies that have the potential to gain the confidence of investors will pass their listing examinations and be listed, with trading on the Exchange starting as soon as possible.

Finally, I would like to briefly talk about our plan for the future. It has been three years since the Abe administration was established. And, on January 1, 2016, it will be three years since the establishment of JPX. In a sense, the government and JPX are sharing an episode in history, with the Abe administration being one week our senior.

The securities industry has been one of the industries that benefited the most from Abenomics. Market conditions have been favorable in recent years, and the securities industry has posted good results. Since the unification of TSE and OSE on January 1, 2013, JPX has successfully completed its market reorganization with cash equities under TSE and derivatives under OSE, consolidation of clearing systems, and self-regulatory operations.

We have also successfully achieved a cost reduction of JPY 8.5 billion, which has been our target since the start of JPX.

Our three year medium-term management plan, set out immediately after the start of JPX, will end next March, and a new plan is currently under formulation.

The new plan will serve as our guide as we work to accomplish our new objectives for the next three years.

J-GATE, the derivatives trading system at OSE, will be renewed in the next fiscal year. We will also start providing services to Tokyo Commodity Exchange (TOCOM) via the new J-GATE and collaborating on strengthening systems services.

We will announce the new medium-term management plan in March next year and hope it shall live up to the expectations.

Q: In the last briefing, you were asked to comment on the compulsory investigation on Yoshiaki Murakami from the Murakami Fund on suspicion of market manipulation. Since you had limited information at the time, you said you couldn’t provide an answer. May I ask once again for your comments on this based on the latest information?

A: At the previous briefing, I came across some news headlines on that matter just before the conference. A few weeks have passed since then, but I do not have information on the investigation in progress other than what the media has reported.

In general terms, JPX Regulation has a division to monitor trading and to check on particularly or even slightly suspicious price movements or trading activities. The division works with the Securities and Exchange Surveillance Commission (SESC) as needed.

Q: Why did one of the 19 IPO candidates for this month cancel its listing?

A: The company decided to postpone its listing and to carefully monitor the progress of its performance this period. The company was not sure if its results would differ from what they assumed and wanted to carefully investigate whether there might be a possibility that they’d have to make large downward corrections to their earnings forecasts after listing.

Q: Do you see this as an accomplishment resulting from the measures JPX, the JSDA, and the JICPA started to take in March to strengthen underwriting examinations?

A: I do not know if we could call it an accomplishment, but the underwriter and the IPO candidate discussed postponing the listing and made the decision on their own, which shows that they at least share our view. Nevertheless, we can’t really say that we see this as a testament to the effectiveness of the measures we have taken.

Q: The SESC issued an order for payment of surcharges to Toshiba on December



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