Mr. Yoshinari Hara President & CEO, Daiwa Securities Group Inc. My name is Yoshinari Hara and I work at the head office of the Daiwa Securities Group. It is a very great pleasure to have been afforded the opportunity to speak here today. Offshore Investment Movement Fuelled by Japanese Zero-interest Rates Australia is currently the hot topic of conversation amongst Japanese securities companies. The reason for this is the recent popularity of Australian dollar-denominated bonds investment amongst Japanese individual investors. If such an investment were made in US dollar or Euro-denominated assets, it would probably be taken for granted and not be the subject of as much discussion, given that these two major currencies account for some 65 percent of the world's exchange transactions. If we look at the context in which this popularity has grown, we can see the fact that Japanese individual investors have come to embrace investment in foreign currency denominated assets as they seek more lucrative returns on their investments given the prolonged low levels of domestic interest rates. Japanese individual investors have always cast a fiercely discerning eye when selecting financial investment products and are known to be risk-sensitive investors. This popularity is surely indicative of the high level of confidence in Australian dollar-denominated assets and the great future expectations that they hold. To give you an example, the balance of foreign currency denominated bonds at Daiwa Securities has increased 2.5 fold overall in the past two years, while our Australian dollar-denominated bonds have grown 10 fold. However, foreign currency-denominated assets still only account for 1 percent of household financial assets, which is around a mere 13 trillion yen in money terms. Investment in foreign currency-denominated financial assets has only just begun. I envisage that in future, this will grow to 10 percent of financial assets, which in terms of current financial assets, would be about 140 trillion yen. Australia's sound public finances and the stable growth that the economy continues to enjoy has earned the nation a triple AAA rating. Moreover, investment in Australian dollar-denominated assets with their very attractive interest rate levels will surely increase more and more in future. Daiwa Securities Group Involvement with Australia Japan and Australia have enjoyed a friendly relationship for many years and our group too has been very closely involved with Australia through our securities business. In 1985, our company entered the Australian capital market in earnest, when we set up a joint venture in Melbourne with the ANZ (Australia & New Zealand Banking Group Limited). In 1989, this became a fully owned subsidiary and is engaged in corporate business focusing on underwriting and brokerage operations. In the late '80s, we served as the lead manager in listing BHP, the worlds' largest resource company, and News Corp, one of the world's foremost media companies, on the Tokyo Stock Exchange. Then in the late '90s, we served as the lead manager of the public offering in Japan for the global offering in the privatisation of telecommunications company Telstra. In 1986, we began to sell investment trusts called Pan Pacific Funds for the first time in Japan, which has gained much popularity with individual investors. We have also developed for the first time a monthly dividend payment type of Australian dollar-denominated bonds and investment trusts. Many of Australia's prominent companies, such as BHP and News Corp, turned their attention overseas at an early stage and have surely achieved internationalisation in all aspects of their business, be it their global growth strategies or financing. Last financial year, our company assisted in issuing approximately 400 billion yen worth of Australian dollar-denominated bonds. As I mentioned at the outset, the Australian dollar-denominated assets investment boom in Japan is also helpful for Australian states and companies in raising funds. As a point of reference, the asset value of Australian dollar-denominated bonds held by Japanese individual investors is estimated at around 1.7 trillion yen. Furthermore, the balance of investment trusts investing in Australian dollar-denominated assets is approximately 570 billion yen. Thus, we can estimate that a total of 2.3 trillion yen is invested in Australian dollar-denominated assets. Formation of an East Asian Economic Bloc and the Role of the Capital Markets I'd now like to turn your attention to how the partnership between Japan and Australia should operate in future, what we need to think about and what we need to do. While economies become increasingly globalised and international competition between companies intensifies, rapid progress is being made in the formation of regional economic blocs and bloc economy zones. In economic terms, this fact is demonstrated in national measures to acquire the competitive edge through economic integration and in harmony with neighbouring nations, and not just merely on a one-nation basis. As you are all aware, the EU (European Union) is the prime example of this. In the Asia Oceania region, in which Japan and Australia are located, we too have no choice but to say that like it or not, we will be incorporated into the mould of a single regional economic bloc in economic terms. At the moment, the EU, the USA, and Asia Oceania rival each other in terms of fundamental economic strength, and analysis suggests that this situation will roughly continue for the next 30 years. Out of these three economic blocs, the Asia Oceania region has a number of challenges to overcome in order to become a single economic bloc. This is due to the fact that the region is move diverse than any other in terms of the stages of economic development as well as culture, language and society. However, compared with other economic blocs, the Asia Oceania region possess the greatest potential and is surely destined to become the most competitive economic powerhouse depending on how its approach hereon. The speed of economic development in China, which is a key nation in this region, is astounding. Our group is rolling out a variety of business projects in China and rapidly increasing their scale and breath. Whenever I have the opportunity to visit the nation, I am taken back by its ever-increasing pace. It goes without saying that further integration and vitalisation of intra-regional trade is required for the growth and development of an Asia Oceania regional economic bloc including China. Intra-regional trade within the EU is said to exceed 60 percent. So what needs to be done in order to further promote trade and commerce within this regional economic bloc? I feel that economic infrastructure, particularly the 'developing and maintenance of financial and capital markets' to firmly support the growth and development of this regional economic bloc is essential. We must not let an event like the 1997 Asian economic crisis occur again. Trade within the region and sustainable growth and stability cannot be achieved unless there are mechanisms to facilitate the smooth supply and internal recirculation of the vast savings within the region, as exemplified by the individual financial assets of the Japanese people, to countries and companies in the region that have high growth potential and require funds. We are on the verge of making great progress in developing and maintaining capital markets in the region. The feverish rate of this progress is illustrated the creation of an "Asian bond market" by the "Executive Meeting of East Asian and Pacific Central Banks" (EMEAP), of which both Japan and Australia are important members, and the ASEAN plus 3 finance ministers meeting. In conjunction with the establishment of an Asian bond market, the issuance of bonds denominated in a basket of Asian regional currencies is also planned with an eye to future economic integration and the issuance of a common currency. A number of specific measures are under consideration, such as the creation of an Asian bond fund and the establishment of an Asian credit organisation. Surely Japan and Australia should actively contribute to creating this Asian bond market as well as to promoting the foundations for a full-scale bond market in the region. Looking at the share market, which is on par with the bond market, the progressive initiatives of the Australian Stock Exchange are the subject of much attention. Australia's share market has a market capitalisation roughly equivalent to domestic GDP and is a very attractive and sophisticated market that functions effectively as an arena for funding for a variety of industries, particularly service industries, such as communications and finance. In 1987, the six stock exchanges that existed in Australia in different states were consolidated into one exchange under the name the Australian Stock Exchange. In October 1998, the exchange transformed itself from a member-based organisation into a listed company; making it the first ever exchange to list its own shares on the market. This move was aimed at building a domestically solid securities market and putting in place a system of corporate governance in the exchange itself that would serve as a model for listed companies. In 1999, settlement system reforms, such as paperless securities, were introduced with the aim of cutting the costs and improving efficiency in securities trading. From the point of view of regional economic ties, the Australian Stock Exchange and the Singapore exchange opened up membership of their stock exchanges to each other at the end of 2001 to allow cross membership. Cross membership is a mechanism that recognises the credentials of members of both countries exchanges to trade in the other country's exchange, and is a mechanism designed to stimulate cross-border stock trading. I have heard that the cross membership arrangement between these two exchanges is currently being used for reference by the Tokyo Stock Exchange in its consideration to forge linkages with these two exchanges and with exchanges in the nations of Asia and Oceania. A look at the examples of Australia's trailblazing reforms naturally offer great pointers for Japanese domestic institutional reform and how Japan's markets should operate. I think that Japan and Australia can carry out a variety of technical cooperation initiatives in order to develop and maintain capital market infrastructure in the region so that we can share a common platform in the future. Conclusion The world economy is moving from an era of competition between nations to an era of competition at a regional economic bloc level. It is envisaged that the source of a competition within intra-regional economic blocs will hinge on the degree of development of all aspects of their institutional infrastructure, including goods, services, people, capital and information . I mentioned that it is essential to develop and maintain financial and capital markets. The reason why I touched upon the creation of an Asian bond market and common currency market, as examples of specific measures, as well as linkages between stock exchanges, is because it is the sharing of trading mechanisms or the unification of the markets themselves that will contribute most to dramatically cutting the costs of capital transactions and currency dealing. The drastic reduction of financial transactions cost, such as "swaps, hedges, and interest" will form the source of financial and capital markets competitiveness in Asia and Oceania, if not also the source of the industrial competitiveness of the regional economic bloc. The flow of money referred to as "finance" is already becoming borderless. It is this flow that supports the foundation for trade policy of nations. Surely it is the role and mission of Japan and Australia to propose various ideas about financial systems, and work together with other nations in the region to create a "common framework for the financial and capital markets of the Asia Oceania region".

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