A frequent criticism of Japan's financial market regulation is that it focuses strongly on formalistic compliance with existing regulations – a so-called gotcha mentality. The country is also accused of neglecting structural reforms, and avoiding dialogue with market participants that might contribute to smoother-functioning and more liquid markets. From the perspective of a financial services provider undergoing a periodic inspection, or struggling to meet the strict investor protection requirements recently introduced by the Financial Instruments and Exchange Law, this charge still might seem valid. However, the past two to three years have seen modernisations that give greater certainty, and in many cases new flexibility, to laws and regulations affecting a broad range of corporate transactions.

To take one example, Japan's new Company Law, most of which took effect in May 2006, permits...