(Provisional translation)

Keynote Speech by His Excellency Yoshimi Watanabe
Minister of State for Financial Services, Government of Japan
at the IOSCO Technical Committee Conference
Tokyo, November 8, 2007

Good morning to everyone attending this conference. I am extremely pleased that the International Organization of Securities Commissions (IOSCO) Technical Committee Conference is to be held here in Tokyo over two days, today and tomorrow, with the attendance from regulatory authorities and market participants from around the world. I warmly welcome you all to Tokyo and would like to take this opportunity to give my thoughts about the various problems faced by the world's financial markets and the efforts of the international community and the authorities in Japan to overcome them.

Exactly ten years ago, Japan was hit by a serious financial crisis. The call market had been operating on the assumption that no defaults would occur, but then the first default since the Second World War did occur. A liquidity crisis had become a reality. Subsequently, three major banks and one major securities company went bankrupt. A historical lesson that we learned from this was that a solvency problem lays behind systemic risk arising from a liquidity problem.

Looking at the trends in today's global markets in this light, beginning in summer this year with the subprime mortgage crisis in the United States, the impact has spread outside the United States to European credit markets, and further to world stock markets and foreign exchange markets. With the spread of the financial technology called securitization, it has become more difficult to specify the sources and scale of credit risk, while a lack of confidence in the rating of securitization products is causing deterioration in the pricing function of the market. As a result, market liquidity has rapidly dried up, which in turn has caused an emergence of liquidity risk in investment vehicles and conduits that had maturity mismatches, and in the financial firms that were providing them with backup lines.

Subsequently, the functions of financial markets have been recovering, but markedly differing conditions can be seen in different markets. It seems it will take some more time to normalize the situation. Steady efforts by both the public and private sectors and cross-border cooperation will be necessary to achieve normalization.

The current crisis is a so-called 21st century-style crisis; therefore a new kind of crisis management adapted to this new kind of crisis is needed. This year happens to be the 20th anniversary of Black Monday; but in the current market turmoil, many kinds of risks are combining with each other and proliferating in such a complex manner that the current situation cannot be compared to what happened 20 years ago. In global financial markets where funds can move from place to place in an instant, a crisis can spread equally fast. I believe it is important to detect risks at early stages in order to prevent crises occurring as far as possible. And if a crisis has occurred, it is crucial to promptly recognize that it has occurred and take precise measures to stop the spread of the damage from the crisis. To this end, it is essential to build the capacity of the various authorities and put in place an international structure for cooperation. This means we need to pool the wisdom of the public and private sectors of each country. A conference like this is a perfect opportunity to discuss issues like these, and I hope that vigorous exchanges of views will take place here.

Regarding the impact of the subprime mortgage problem on Japan's financial system, I do not think that, at this point in time, the situation we are in is likely to become serious. But we must not be complacent and must be vigilant. Our policy is to continue to monitor the situation with great care, including the indirect effects of the subprime problem, and if there is a problem, to make every effort to detect it and fix it as early as possible.

The objective of this Tokyo conference is to think about not only short-term issues that we are facing currently, but also longer-term issues, such as what kind of form market regulation should take given the major trend towards globalization and integration of finance. The theme of this conference-Competition, Convergence and Cooperation-accurately reflects awareness of this problem.

One of the longer-term issues is the convergence of accounting standards. The links between the capital market of one country and those in other countries around the world are getting deeper. I therefore hope to see discussions about what kinds of accounting standards and auditing are needed to ensure that high-quality, internationally acceptable financial reporting is implemented, and about whether or not it is feasible to create a single set of effective worldwide accounting standards.

Other marked trends in world capital markets in recent years include the intensification of competition among stock exchanges and the progress of cross-border consolidation. Points for discussion will no doubt include the impact of competition among stock exchanges, the possibilities for international standardization, the mutual recognition of regulations foreseeing consolidation, and so on.

Furthermore, the issues to be discussed include approaches to supervision of financial conglomerates, which now provide diverse financial services on a global scale; strengthening of cross-border cooperation among regulatory authorities, which is now essential because of the globalization of market transactions; and approaches to regulation of alternative investments such as hedge funds and private equity, which have been increasing their presence in recent years. Regarding the last topic, that is, funds, while they supply liquidity to the market and contribute to innovation in financial technologies, the questions of how best to handle them given the size of their impact on the stability of the financial system, and how to protect investors, are currently major points of debate among the authorities. I hope there will be creative discussions on these issues at this conference.

In this way, the items on the agenda in this Tokyo conference comprehensively cover the major issues currently faced by the regulatory authorities and market participants in each country as they attempt to respond to globalization. Unfortunately, I will be unable to participate in the panel discussions myself because I have to attend deliberations in the Diet. But I am looking forward to the post-conference report by the attendees from the Financial Services Agency.

This is the fourth time this conference has been held, after the conferences in New York, Frankfurt, and London. It just so happens that we are currently debating policies to strengthen competition with the aim of further enhancing the appeal of Japan's financial and capital markets as a center of international finance. Our policy is to formulate a plan before the end of this year to make the Japanese market an appealing market that is able to attract investment domestically and from overseas - metaphorically speaking, a market like an ecosystem with abundant bait that can attract fish from all around the world. And the entire Government of Japan is to work together to promote the plan. Thus I think that we are hosting this conference in truly good timing.

Let me conclude these remarks by saying that I hope the exchanges of information and debates in this conference are valuable for all of the participants.

Thank you.