Fair-value freeze in Japan

Corporates and financial institutions have long awaited the introduction of the internationally accepted fair-value option to hedge accounting in Japan. They believe a fair-value option would allow more institutions to hedge their risks, particularly in areas such as credit and commodities. But a change in the rules is looking less likely.

Ever since Japan embarked on a process to converge domestic accounting rules with international accounting standards five years ago, expectations have grown that a ‘fair-value option’ would be introduced in the country. This option has been used by corporates and financial institutions around the world to bypass stringent hedge effectiveness tests for hedge accounting treatment.

Hedge accounting is a complicated practice (see box, page 22). Bound by strict hedge effectiveness requirements, a