A new heavyweight critic of the Volcker rule has emerged: the Japanese government.

The Bank of Japan and Japan’s financial-services regulator sent a joint letter to U.S. regulators raising concerns about the impact on Japanese firms and markets of the Volcker rule, which restricts U.S. banks from making bets for their own profit. The rule is widely seen as one of the most important components of the landmark Dodd-Frank financial-overhaul law.


The letter, sent Dec. 28 and made public this week, said the rule could have “an adverse impact” on the trading of Japanese government bonds, one of the largest bond markets in the world. Any softening in the markets for Japanese sovereign bonds potentially could hurt the ability of the Japanese government to raise funds.

The letter also said U.S. banks might be forced to close their Japanese operations as a result of the rule. Japanese banks, meanwhile, might “cease or dramatically reduce their U.S. operations,” it said.

The concerns were relayed to Treasury Secretary Timothy Geithner in a meeting this week with Japanese Finance Minister Jun Azumi. Mr. Geithner told Mr. Azumi he is aware of the concerns and noted U.S. regulators still are reviewing the rule, according to a person familiar with the matter.

The Volcker rule, named after former Federal Reserve Chairman Paul Volcker, has come under criticism by the financial industry. Critics have said it will restrict banks from engaging in activities that help companies and governments raise cash.

Defenders of the rule have dismissed those complaints, arguing they are designed to protect the institutions that helped cause the global financial crisis. They point out that trading in foreign sovereign bonds played a key role in the downfall of MF Global Holdings Ltd. Backers said there is little evidence that restrictions on the activities of large financial institutions will hurt trading. Smaller trading operations will step in and pick up the slack as big banks pull back, they said.

Industry complaints “are organized around protecting the biggest banks and their ridiculous bonuses,” said Dennis Kelleher, chief executive of Better Markets, a nonprofit advocacy group.