Chapter 12
Japan
A Comprehensive Picture of Islamic Finance*
Etsuaki Yoshida
Adjunct Research Fellow, Center for Finance Research and Waseda Graduate School of Finance, Accounting and Law, Waseda University
It is common knowledge that Islamic finance is available to, and sometimes offered by, non-Muslims as well as Muslims. One of the characteristics of modern Islamic finance is that non-Muslim countries with highly developed financial centers are quite positive about involving Shari'ah-compliant financial business in their financial systems.
The United Kingdom and Singapore are good examples of non-Muslim countries with substantial Muslim populations that have welcomed Islamic finance. However, even places with small Muslim populations, such as Korea and Hong Kong, are becoming involved in the newly growing market.
Japan is not an exception. The world's third largest economy is known in the industry as a potential market for Islamic finance business. Japan's positive attitude toward Islamic finance in recent years is characterized by the establishment in 2011 of a legal framework for Japanese Islamic bonds, or J-sukuk. Still, there is a long story behind this symbolic development.
The timing of the beginning of Japan's relationship with Islamic finance is difficult to detect through written materials, but an old book titled Islamic Banking: Theory, Practice, and Challenges, written by Fuad Abdullah Al-Omar and Mohammed Kayed Abdel-Haq in 1996, indicates that a Japanese bank, then called the Industrial Bank of Japan, was involved in Islamic financing deals in London around the 1980s. Many Japanese firms—bankers, energy companies, and general trading firms—were engaged in Islamic transactions in London in those days.
Yet, Islamic finance in this context is slightly different from what it is now. Those people were engaged in a type of transaction called inah, in which the borrower buys a certain amount of goods, such as oils or metals, with deferred payment and then sells them back to the seller, or the lender, with payment on the spot to the borrower. The price of the immediate payment is lower than that of the deferred one, and the differential between the two is virtually traded as an interest rate. This was considered Islamic, since the differential, on the surface, was considered as a profit of trading goods, not as an interest rate.
This type of financial transaction is different from modern Islamic finance in the sense that there was no screening by a Shari'ah board and the creditors were not necessarily financial institutions. Nevertheless, the fact that some Japanese people had engaged in this type of trade was helpful in some way when modern Islamic finance was introduced to Japanese businesses as a new global phenomenon. Islamic finance showed up in Japan around 2004 or 2005, along with a rise in oil prices, and it was not entirely unfamiliar to those who had had experience with inah.
Despite the growing interest in Japan and its economic position in the global context, the nation has not yet substantially seized the opportunity of the Islamic finance business. Other financial centers—such as the United Kingdom, the United States, Singapore, and Hong Kong—have Islamic business in their markets. According to my analysis, there are three major reasons that Japan is behind: a lack of appropriate knowledge, a lack of networking, and geographical and historical shortcomings. The last cannot be changed in a short time, so I will focus on the first two and consider solutions for each for more Japanese-related Islamic transactions.
As the Islamic finance industry becomes more globalized, it has come to be known in a deeper and wider manner among the Japanese (see Table 12.1). Many seminars have been held, many articles have appeared in newspapers and magazines, and at least 10 books have been published on the topic in the local language.
Table 12.1 Chronological Development of Japan's Islamic Finance
| Year | Institution | Content |
| 2001 | Tokio Marine | Launched takaful business in Saudi Arabia. |
| 2004 | Tokio Marine | Set up re-takaful company in Singapore. |
| 2004 | Tokio Marine | Started takaful business in Indonesia. |
| 2005 | JBIC | Cofinanced with Islamic lenders to Bahrain. |
| 2005 | ARCAPITA | Set up Islamic fund for Japanese properties. |
| 2005 | Tokyo Commodity Exchange | Signed MOU with BMA for Islamic trades. |
| 2006 | JBIC | Established Shari'ah advisory group. |
| 2006 | Bahrain Monetary Agency | Held seminar in Japan. |
| 2006 | Tokio Marine | Established takaful company in Malaysia. |
| 2007 | JBIC | Joined IFSB as first Japanese institution. |
| 2007 | Aeon Credit Malaysia | Issued sukuk. |
| 2008 | Tokio Marine Takaful | Got license in Egypt. |
| 2008 | Toyota (Malaysia) | Issued sukuk. |
| 2008 | Nikkei | Held Islamic finance seminar. |
| 2008 | Financial Services Agency | Changed banking regulations. |
| 2009 | SMBC/BTMU (Malaysia) | Set up Islamic banking teams. |
| 2010 | Nomura | Issued sukuk. |
| 2012 | Financial Services Agency | Established J-sukuk legal and tax framework. |
Although the quantity of information is great, the quality of the information is not sufficient. Since Islamic finance is very new to most Japanese, a lot of wrong information has been conveyed to the people by those with only fragmentary knowledge. Consequently, Islamic finance is somewhat misunderstood by the Japanese people. There is a lot of room for education by international experts, but there is a language barrier.
Some professional Japanese bankers are already well informed and ready to offer Islamic transactions in their respective business fields. However, even they are not well involved in Islamic transactions. One of the reasons for this is a lack of communication with the Islamic finance community in the market, both clients and cofinanciers.
Japanese financiers tend to offer financial services mainly to Japanese customers, even in overseas markets, although the situation is starting to change. In comparison, U.S. and European banks tend to be outstanding on a global customer basis, including stepping into local markets. Through these businesses, they are soon faced with demands for Shari'ah-compliant services, whereas Japanese banks avoid this demand. The lack of contact points, or networks, with Islamic communities is another major reason for less developed Islamic business among the Japanese. This is a business opportunity for global Islamic finance experts who intend to expand business with Japan.
Corporate Banking
Although Islamic banking enjoys the largest part of the current Islamic financial markets in the world, Shari'ah-compliant banking products are not offered in Japan.
There are two reasons for this. One is a lack of demand. There is a very small Muslim population in Japan, estimated at less than 0.1 percent. Corporate banking (as well as retail banking, which will be discussed below) is largely affected by religious beliefs. The other reason is the regulatory constraint, which is discussed in the next section. Banks are not allowed to engage in nonfinancial activities, which means that the modes of Islamic banking that involves commodities—such as murabahah, ijarah, and istisna—are prohibited.
Regulatory Changes
In December 2008, Japanese banking regulations changed to accommodate Islamic banking. An amendment was added to the Ordinance for the Enforcement of the Banking Act. It would be wrong, however, to think that Islamic finance was completely prohibited before the amendment and became totally allowed after it.
The amendment (unofficially translated by the author) states that “a transaction that is deemed equal to moneylending, although it is not moneylending (but is included in the business domain of a bank's subsidiary)” is permitted if the following two conditions are met: “(1) the transaction must not involve an interest rate because of religious constraint”; this means Islamic debt-related transactions, but the word Islamic does not appear, in order to avoid any inequality among religions; and “(2) the transaction should be authorized by a board comprising those who have expertise in the religious discipline”; this means a Shari'ah board, of course, but again any wording pertaining to a specific religion is avoided.
Islamic lending is not considered as moneylending, because moneylending, by definition, involves interest rates.
In order to fully understand the content of this amendment, it is necessary to know why it was added. In Japan, Islamic banking transactions are considered to be difficult for a bank to offer because of the existing Banking Act, Article 10 (Scope of Business), which says, “A bank may conduct the following businesses” and lists several types of businesses offered by a bank, such as deposit, lending, foreign exchange, and remittance. Article 11 lists activities related to the banking business.
Article 12 states, “A bank may not conduct business other than the businesses under the provisions of the preceding two articles and the business conducted pursuant to the provisions of the Secured Bonds Trust Act (Act No. 52 of 1905) or other relevant laws.” According to this, an Islamic transaction that involves goods trading (such as one that employs the concepts of murabahah, ijarah, and istisna) is considered to be outside the scope of a bank's business.
However, as interest in Islamic finance gradually grew in Japan in 2006, there was a request from the financial industry for Islamic financial business, and this led to the amendment, which has a few important limitations.
First, it stipulates the inclusion of Islamic finance in the business domain of a bank's subsidiary—not of the bank itself (although again, the word Islamic is avoided). Yet the bank itself is not allowed to offer a goods-trading type of Islamic financing, according to the majority of legal experts.
Second, financial institutions other than banks are not covered by this amendment and may be allowed to offer Islamic products according to their business licenses. For example, asset management companies have sold Islamic equity funds, and a general insurance company was engaged in the takaful business even before this amendment.
Third, the business domain of other financial institutions is not mentioned in this amendment, so it is not clear whether or how (and by what type of financial institutions) Islamic products should be dealt with. Therefore, sukuk, for example, was not interpreted by this amendment; it had to wait for a change made in 2012, which will be explained later.
Market Positioning
After the adoption of the amendment in 2008, Japanese banks started to move. Sumitomo Mitsui Banking Corporation Europe, the group's UK subsidiary, established an Islamic finance team and now offers Islamic services out of London. It hired some non-Japanese experts on Islamic banking from European banks to strengthen this business. Bank of Tokyo–Mitsubishi UFJ set up a unit of Islamic banking in its Malaysian subsidiary and is now engaged in local and regional Islamic business. Note that these are legitimate because they are subsidiaries of each bank, not a branch of the bank itself.
Mizuho Financial Group has not made any institutional change. However, the then Mizuho Corporate Bank concluded several Islamic transactions, including arranging an Islamic syndicated loan to the Ma'aden Phosphate Project in Saudi Arabia through its Dutch subsidiary. Also, the group later established a subsidiary in Malaysia, and the subsidiary intends to offer Islamic products as well as conventional ones.
Major Performances
The practical accomplishment of Islamic banking activities by Japanese banks has just begun, which makes it difficult to evaluate the performance at this moment. We need a couple of years to judge whether the deals mentioned earlier are successful.
Nevertheless, the prospects seem bright for overseas Japanese banks, considering that their strength in conventional banking can be applied to the Islamic equivalent. Their business networks (e.g., customers, market participants as partners, and ancillary services providers), product development skills, and risk management systems can all contribute to developing the Islamic banking business in overseas markets.
Retail Banking and Microfinance
Unlike the corporate Islamic banking sector, retail Islamic banking is not an area that Japanese banks can seek for business opportunities.
There is little demand for an Islamic retail banking business inside Japan because of the absence of a significant Muslim population. There is also little demand for the microfinance business inside Japan because of the absence of a substantial number of economically challenged people.
The current situation and prospects are also pessimistic for an overseas retail banking and microfinance business by Japanese banks. The reason is quite simple. Japanese banks have little expertise in conventional retail banking and microfinance in foreign countries; thus Islamic equivalents are hardly expected.
Table 12.2 summarizes the current situation and future prospects.
Table 12.2 Business Matrix for Japanese Banks
| Domestic | Overseas | |
| Retail | Most unlikely | Slightly hopeful |
| Wholesale | Inbound financing expected | Highly promising |
The background described above is structural, so there is no reason to expect a big change from the current situation regarding Islamic retail banking and microfinancing by Japan.
Debt Capital Markets (Sukuk)
There are a few Japanese corporations that have issued sukuk so far. Aeon Credit Service (Malaysia), a credit card and loan service provider, was the first Japanese sukuk issuer, in 2007. The musharaka-backed sukuk was an MTN/CP program, denominated in Malaysian ringitt, the local currency. The sukuk proceedings are used for the company's Islamic financing, including personal loans and motorcycle loans that are Shari'ah-compliant.
Toyota followed this movement. Its subsidiary, then UMW Toyota (now Toyota Capital Malaysia) established a sukuk facility denominated in the local currency to finance its auto loan business. In Pakistan, a local entity of ORIX Leasing issued sukuk.
In July 2010, Nomura Holdings, Japan's biggest investment bank's parent company, issued sukuk in the Malaysian market, amounting to US$100 million, with two years of maturity, listed on Bursa Malaysia. This is the first sukuk issued by a Japanese entity; those previously mentioned were issuances by Malaysian subsidiaries.
Nomura sukuk is ijarah-backed, and the proceeds are used for the Nomura subsidiary's aircraft leasing activities. Nomura raised funds Islamically in the Bahrain market as well, using commodity murabahah. The Islamic facility amounts to US$70 million.
Sukuk Regulation and Taxation: The Case of J-Sukuk
Besides the policy action by the Japanese government to accommodate the emergence of Islamic finance in the Ordinance for the Enforcement of the Banking Act, the capital market underwent some sukuk-related legal changes.
In August 2010 the Financial Services Agency of Japan proposed a taxation change in sukuk transactions as one of the comprehensive tax amendment proposals for the fiscal year 2011. The proposal was accepted.
The tax change exempts nonresident (i.e., foreign) sukuk holders from taxation on profit rate and some other technical measures for arranging a sukuk transaction; this serves to maintain tax neutrality with the equivalent conventional bonds.
However, even more important, in my view, is the measure's introduction of a possible legal structure of sukuk under the Japanese legal framework. The sukuk structure provided in this scheme, using a concept called a special purpose trust and the ijarah mode, is as follows.
The issuer (not a Special Purpose Company issuer as in an ordinary sukuk structure, but the actual fundraising entity, such as a corporation or a government) transfers its asset to a special purpose trust, and enters a leasing (ijarah) contract. A trust agreement on the asset is made with the trust bank that manages the asset under this scheme. The profit rate can be Shari'ah-compliant in the sense that the profit rate, the coupon equivalent, arises from the leasing activity, so it is recognized as a quasi-bond beneficiary under the Asset Liquidation Law of Japan.
Note that this scheme is not solely structured for sukuk, and it is one of several possible sukuk schemes using the existing legal framework.
This scheme involves an interesting issue. Sukuk is often called an Islamic bond, but that is difficult if we conclude that sukuk is a bond for 100 percent. Indeed, companies and governments issue debt securities, based on their (or their guarantors', if any) credibility, with periodic coupon payments. In fact, the majority of issuers, arrangers, and investors regard sukuk as the Islamic equivalent of a conventional bond, in terms of its economic function.
Nevertheless, the structures of sukuk are totally different from those of an ordinary bond. They usually involve a special entity to generate cash flow of profit, paid as a coupon-equivalent to sukuk holders. This is a feature not of an ordinary bond but rather of pass-through securities, which are more complicated than a simple bond.
The scheme prepared by the Financial Services Agency is, in a sense, very sophisticated because it involves both two features of sukuk: similar to a bond in its economic functions, but involving investors as owners of the trusted assets, with characteristics similar to equities.
This measure is important in three ways. First, it focuses on capital markets, which are one of the major growth drivers of the global Islamic finance industry. Second, it pays attention to foreign investors, who are key players in the market. Third, it shows Japan's positive attitude toward Islamic finance to the Japanese themselves and to the rest of the world, after the banking regulation change in 2008 explained earlier.
This measure is based on the tax neutrality concept between conventional bonds; it does not give preferable treatment to sukuk at all. This is in line with the concept of policy actions taken by other non-Islamic countries, such as the United Kingdom.
Equity Capital Markets
Unlike the banking industry, equity products and equity-related businesses are easier for Japanese financial institutions because of the regulatory issues for banks, as explained earlier. In this sense, sukuk markets have potential as well, but equity business is easier in terms of the regulatory aspects, considering the more complex structures for debt capital market products (sukuk) in order to avoid dealing with interest rates. Therefore, unlike the banking industry and the sukuk business, an Islamic equity business can grow easily in Japan.
Indexes
Islamic equity indexes are one of the easiest business fields in Islamic finance. They do not require an explicit counterpart as a buyer of the financial service, they do not require any legal change in Japan, and they do not require significant additional business skills (except for the Shari'ah-screening aspects). There are two major indexes.
The first one is the S&P TOPIX Shari'ah 150 Index, which was developed jointly by Standard & Poor's and the Tokyo Stock Exchange as a Shari'ah-compliant version of the conventional S&P TOPIX 150 Index. The Shari'ah index is composed of stocks that pass the S&P's Shari'ah screening process. There are 150 stocks, which naturally means a fewer number for the Shari'ah index.
One big shortcoming of this index is that there are no Islamic equity products that track the index at the moment. In this sense, the other important Islamic index is worth mentioning.
The second index, the FTSE Japan Shari'ah 100 Index, was launched by FTSE in cooperation with Daiwa Asset Management. The index was tracked by the exchange traded fund called Daiwa-FTSE Shari'ah Japan 100, the details of which are explained in the next section.
Private Equity Funds
Private equity investment is one of the most Islamic financial transactions, considering its risk-taking and business-promoting nature. Although there are no such transactions at the timing of this writing, an asset management company called PNB Asset Management Japan—a subsidiary of the Malaysian sovereign wealth fund, Permodaran National Berhad (PNB)—is exploring the possibility of establishing an Islamic private equity fund in Japan, along with a local private equity investment firm. Meanwhile, SBI Group established an Islamic private equity fund in Brunei with that country's Ministry of Finance in 2010.
There is a chance that Islamic investors from abroad invest in a Japanese private equity fund. However, this information is not always available to the public.
Asset Management
Asset management is easier to explore in Japan than other types of financial business. Following are examples of asset management businesses, broken down by products. Funds are described according to their investment targets.
Equity Funds
Examples of equity funds, Nomura Asset Management and Daiichi-Life IBJ Asset Management, were mentioned earlier.
Although there was a unit trust fund called the Shari'ah Value Fund, offered by a Japanese asset management company, it is not Shari'ah-compliant at all, judging from the fact that there is no Shari'ah board involved. Also, the dividend to the investor is paid out of conventional performance bonds, which make the transaction apparently forbidden under Shari'ah.
Exchange Traded Funds
The only case of an Islamic exchange traded fund dealt by a Japanese financial institution is the Daiwa-FTSE Shari'ah Japan 100. It was launched in May 2008 and listed on the Singapore Exchange (SGX). The fund tracks the FTSE Japan Shari'ah 100 Index, as explained earlier.
Unfortunately, the fund enjoyed less popularity than was expected, and Daiwa ceased listing this fund in 2012.
Real Estate Funds
An important example of a real estate fund is ARC-Capitaland Residences Japan, which was jointly developed in 2005 by Arcapita, a Bahraini Islamic investment bank, and Capitaland, a Singaporean property developer. The fund invested in residential properties in Japan.
Another example is the Kuwait-based Boubyan Global Real Estate Fund, which invested in office properties in Japan This deal was unparalleled in the sense that (1) many Japanese companies were involved in the structure, including the property manager, Atlas; and (2) an interesting framework was introduced to make the whole scheme Shari'ah-compliant, using two special purpose companies.
In the field of real estate investment trusts, Daiwa Securities was one of the arrangers of the famous Sabana REIT listed in Singapore.
Endowment Funds
There are no endowment funds in Japan because there is very little demand for religious products domestically.
It would be difficult to expect these deals to develop as a trend, but there are some possibilities for small Muslim populations and for some global contributors to get involved in them.
Takaful and Re-Takaful
Believe it or not, one of the world leaders of the takaful industry is a Japanese insurer: Tokio Marine provides takaful products on a global scale.
There are no major regulatory issues regarding the takaful business for Japanese insurers. The largest insurer first provided takaful services in Saudi Arabia in 2001. The Shari'ah-compliant business was followed by its Indonesian subsidiary in 2004. In the same year, Tokio Marine Nichido Re-Takaful was launched as the group's first re-takaful operator. Tokio Marine stepped into the Malaysian takaful market in 2006 as a joint venture with the Hong Leong Group named Hong Leong Tokio Marine Takaful. The group's effort to expand the takaful business reached Egypt in 2010, as Nile Family Takaful and Nile General Takaful.
This global outreach makes Tokio Marine one of the giants of the world takaful market.
Market Positioning
In 2010, the Mitsui Sumitomo Insurance Group (MSIG) expressed the desire to establish a strategic alliance with the Hong Leong Group in Malaysia, including a takaful business. The next year, MSIG completed its investment in the takaful subsidiary in Malaysia.
Hong Leong's takaful subsidiary in Malaysia is only one entity, which means that the one Tokio Marine invested in and the one MSIG invested in are one and the same company.
Although Tokio Marine was the front-runner in the takaful business in Malaysia, the latecomer, MSIG, succeeded in acquiring the takaful subsidiary because of the comprehensive alliance with Hong Leong as a brown field investment.
So far, these two are the only takaful businesses offered by Japanese financial institutions.
Prospects
As explained earlier, there is very little demand for Islamic financial products in retail markets in Japan because of the very small Muslim population. The same can be said about the takaful market.
However, as we saw in the previous section, an overseas takaful business by Japanese insurers is highly likely. One of the reasons for this positive projection has something to do with the Japanese market. The insurance market is almost saturated in Japan, and the size of the market will gradually decrease along with the diminishing population. Insurance companies naturally turn to overseas markets to maintain their insurance revenues. The world contains a Muslim population of roughly 20 percent, so there are many potential markets for Japanese insurers to explore.
Related businesses can also grow. The asset management business is one of the promising areas. Takaful operators will manage to invest the funds collected from participants in a Shari'ah-compliant manner as a matter of course. As the takaful business grows globally, the demand for asset management business will also increase.
The prospects of the takaful business for Japanese insurers are quite good. The regulatory environment seems positive as well, which created a supportive atmosphere for the industry's growth. The regulatory interpretation of the takaful business was quite similar to that of conventional insurance, which made insurance companies willing to adopt the Shari'ah-compliant version of their business. Again Tokio Marine was the frontrunner. Its dialogue with the financial authority of Japan, leading to an appropriate understanding of the issue by the authority, paved the way for this positive development, unlike with the banking industry.
Sovereign Wealth Funds
Although the Japanese government is quite positive about promoting Islamic finance as a policy maker, it is not as positive about promoting Islamic finance by being a player.
However, Islamic finance is significant for international relations in many ways. Japan must have good relations with the Middle East to secure oil imports, and the government seems to be willing to diversify the aspects of the relations—not just limited to oil trading, but for more business, cultural, and other ways. In this sense, Islamic finance can be viewed as a tool for deepening the ties between the two parties.
There was a discussion several years ago among politicians about establishing a sovereign wealth fund in Japan that would include Islamic investments. So far, however, that idea has yet to come to fruition.
If the Government Pension Investment Fund, the largest institutional investor in Japan, were to make an investment in Islamic assets, it would soon create an unparalleled deal. However, a lack of religious motivation for Islamic investments makes it difficult for Japanese investors to make them.
Still, there are three possible reasons for them to invest Islamically. First, they might want to make quasi–socially responsible investments. As is often pointed out, Islamic finance has several points to share with socially responsible investments, including avoiding investments in gambling and alcohol. Second, the more the Islamic investment universe grows, the more frequently Japanese investors will happen to invest in Islamic assets as a result of seeking suitable assets for their investment portfolios. Given that there is no difference between Islamic and conventional assets in terms of portfolio theory, this could actually happen. Third, Japanese investors may want to diversify their portfolios in a more detailed manner, and they may prefer involving Islamic assets in their portfolios for this diversification purpose.
Given the lack of religious incentive, sovereign investors will not be likely to get involved in Islamic investments. However, the possibility is greater for them to come in contact with Islamic assets as the Islamic investment universe gets bigger.
Regulatory Issues
Unlike the cases in major non-Muslim countries such as the United Kingdom and Singapore, the Japanese legal system requires a Shari'ah screening by a Shari'ah board, either an internal or an external one. This requirement comes from a unique interpretation of the Banking Act. As explained above, an Islamic banking transaction in Japan is interpreted not as the lending of money but as something else that can be identified as a lending equivalent. An Islamic transaction must be checked by a Shari'ah board to confirm that it is actually an Islamic financial transaction, not just from the viewpoint of Shari'ah compliance itself.
In terms of standardization, no action is planned. There are several Japanese financial institutions that gained observer status at the Islamic Financial Services Board, an international standard-setting body. These institutions are the Japan Bank for International Cooperation, Bank of Japan, the Japan Securities Dealers Association, Sumitomo Mitsui Banking Corporation, Mizuho Bank, Bank of Tokyo Mitsbishi UFJ Malaysia, Nomura Asset Management (Malaysia), and Tokio Marine Middle East. However, given the few transactions of Islamic finance, especially within Japan, it seems there is no need for standardization related to Islamic finance in Japan.
Tax and Accounting
There is only one tax treatment regarding Islamic finance: the comprehensive arrangement to realize the tax neutrality between the J-sukuk framework and the existing framework for conventional bonds.
As explained earlier, the development of an Islamic financial framework was intended for cross-border transactions, not for domestic deals, because of the lack of a substantial Muslim population.
There are no special financial reporting standards for Islamic finance. All the transactions that are Shari'ah-compliant will be treated as conventional equivalents. For example, a Shari'ah-compliant debt security that is issued under the framework of the J-sukuk will be treated as a quasi-bond beneficiary, under the Japanese legal framework.
Tax Legislation
There is no special tax legislation for Islamic finance, except for the tax framework for the J-sukuk.
Generally speaking, Japanese banks that operate globally—such as SMBC, Mizuho, and BTMU—should have globally consolidated accounting bases, including local entities in Malaysia that offer Islamic financial products. However, all the overseas offices should be treated according to local tax legislation, and the consolidated financial results, as the groups' outcomes, will be treated on a Japanese tax framework, which means there is no relation with Islamic financial activities.
Tax Neutrality
There is no special tax neutrality framework for Islamic finance, except for the tax neutrality treatment for J-sukuk, in line with the conventional equivalent.
Islamic financial transactions inside Japan, both in retail and wholesale deals, are not big enough for tax change requests to be fulfilled.
However, as Islamic financial transactions are already approved for the subsidiaries of banks, regardless of the location of their base offices, there will be a demand for tax neutrality for murabahah-based asset financing, as in the United Kingdom and Singapore.
Tax Incentives and Exemptions
There are no special tax incentives or exemptions for Islamic finance, except for the tax neutrality treatment for J-sukuk, in line with the conventional equivalent.
Note, however, that the tax exemptions included in the J-sukuk framework are for tax neutrality with the equivalent conventional bonds, not for promoting sukuk transactions by tax incentives.
This, of course, is related to the Muslim minority situation in Japan, and the equality of religions under the Constitution also matters.
Other Tax and Accounting Issues
There is no official request for tax or accounting modification at the moment. However, along with the potential increase in Islamic financial transactions by the Japanese, there will surely be many types of requests.
In a broader sense, one issue lies in human resources. There are not many accountants or tax authority people who can fully understand Islamic transactions. This issue should be resolved through education. Fortunately, the Waseda Graduate School of Finance, Accounting and Law has established a regular course on Islamic finance, and such a professional education is the key to supporting Islamic finance in Japan. The issue is not limited to tax and accounting matters, however, but extends to Islamic finance in general.
In this sense, the Waseda Graduate School established the Memorandum of Understanding for collaboration with the International Center for Education in Islamic Finance, based in Kuala Lumpur, Malaysia. This cooperation can expand the knowledge of Islamic finance among the Japanese banking community, including through the use of the center's online education program.
Conclusion
Interest in Islamic finance and policy changes for it in Japan are still in the incipient stage. This means that the current situation will be developed in nontax and nonaccounting factors.
Still, as more Japanese implement Shari'ah-compliant businesses, this area is expected to increase its significance in the finance community as a whole.
About the Author
Etsuaki Yoshida has taught Islamic finance at the Waseda Graduate School of Finance, Accounting and Law since 2008 as a visiting associate professor. He was an economist at the Bank of Japan, mainly in charge of global financial markets and the Japanese economy. He now leads research and development for Islamic finance at the Japan Bank for International Cooperation and conducts sovereign risk analysis and economic research.
Yoshida has authored three books on Islamic finance in Japanese: Introduction to Islamic Finance (2007), Why Islamic Finance Is Robust (2008), and Modern Islamic Finance (2008, coauthored). He received a B.A. from Hitotsubashi University in Japan and also attended Harvard University.