Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

August 4, 2008

[Opening Remarks by FSA Commissioner Sato]

Good afternoon. I do not have any particular statement to make.

[Questions and Answers]

Q.

In the recent cabinet reshuffle, Mr. Motegi was appointed as Minister for Financial Services. Could you tell me how you feel about his appointment, what you have talked about with him since his appointment and what specific instructions, if any, you have received? Also, how you assess the achievements of former Minister Watanabe?

A.

Minister Motegi has taken office following the cabinet reshuffle. I am glad that a person with a broad range of experiences and excellent judgment like him has become our minister. We FSA staff will work as one under new Minister Motegi and strive toward achieving the three major objectives of financial regulation, namely “stabilizing the financial system,” “enhancing the protection of users and their convenience” and “establishing a fair and transparent market.”

Specific tasks include, first, how best to deal with the continuing turmoil in the global financial markets and, secondly, how to ensure that Japan’s financial sector exercises its financial intermediary role properly amid the signs of a domestic economic downturn and the increasingly severe business conditions for small- and medium-size enterprises (SMEs). A third major task is to strengthen the international competitiveness of Japan’s financial and capital markets. I am sure that these will be among major themes we will deal with under the new minister.

We appreciate the valuable counsel we received from former Minister Watanabe during his term of office that lasted nearly one year. Over the past year ― the subprime mortgage problem emerged exactly one year ago ― the global financial market has been in a state of turmoil, and Minister Watanabe provided us with timely and appropriate counsel. Regarding another major theme, namely injecting vitality into Japan’s financial and capital markets and strengthening their international competitiveness, the government adopted the Plan for Strengthening the Competitiveness of Japan’s Financial and Capital Markets and drafted a bill to amend the Financial Instruments and Exchange Act, in accordance with legal changes necessary for the implementation of this plan. This bill has been submitted to the Diet and enacted.

Q.

Did you discuss anything particular with Minister Motegi?

A.

We have just introduced ourselves to each other, and I have yet to receive instructions from him. I expect that the broad direction of his instructions will be in line with the themes I spoke of earlier.

Q.

I think that the first-quarter financial results of major banks announced recently showed a clear trend of increasing disposals of non-performing loans and indicated a weakening of their profitability. How do you assess these financial results?

A.

It would be too early to say anything definitive regarding the financial results of major banks for the first quarter of fiscal 2008, or the April-June period, as some banks have not yet announced their results. However, according to the results so far announced, net core business profits generally dropped by 20-30% year-on-year, and many banks also posted a decline in net profit. One factor behind the deteriorating profitability is the fact that although the amount of losses related to securitized products is decreasing, losses continue to arise at Japanese financial institutions as tensions remain in the global markets. Another factor is an increase in credit-related expenses, including the cost of bad loan disposals, that have come with the materialization of downside risks for the economy, due to the surge in prices of crude oil, grains and raw materials. A third factor is the weakening growth of profitability in the mainstay lending and fee-based businesses. In any case, the FSA (Financial Services Agency) will closely watch financial market developments and their impact on the financial institutions while maintaining cooperation with other authorities in Japan and abroad.

Q.

I will ask you about the recent meeting of Local Finance Bureau chiefs. As you said earlier, I think that downside risks for the economy are materializing. Could you tell me what was reported at that meeting, with regard to the state of regional finance and the lending stance and management condition of financial institutions?

A.

The meeting of Local Finance Bureau chiefs held on July 31 was the first such gathering in the new program year. At the meeting, the FSA’s bureaus and divisions reported on a broad range of matters, including the current tasks for the FSA in its inspection and supervision in order to promote the sharing of perspectives and information between the FSA and the Local Finance Bureaus.

Although I would like to refrain from explaining specifics of the discussions conducted at the meeting, I will tell you about our recognition of the current state of regional finance.

Regarding the condition of regional economies, we understand that since downside risks are materializing amid the surge of crude oil, grain and raw material prices as I said earlier, SMEs, which are principal customers of regional financial institutions, face severe business conditions.

As for the lending stance of financial institutions, the amount of outstanding loans provided to SMEs has been declining. In light of this, the FSA conducted a survey in June, and the results showed that there were the problems I will explain to you, at least at the time when the survey was conducted in June. First, the sentiment of SMEs about their business conditions is gloomy, amid the surge in the prices of crude oil and raw materials, and slumping sales. Secondly, they face increasing difficulty raising necessary funds. However, this fund-raising difficulty has been caused in large part by sales-related problems, such as sales slumps and slow inventory turnover.

Regarding regional financial institutions’ management conditions, they have been engaging in “relationship banking” for the past several years. This is intended to improve the profitability and soundness of financial institutions themselves through the rehabilitation of SMEs and the revitalization of regional economies. As this initiative has brought about some benefits, indicators of the soundness of regional financial institutions as a whole, such as the capital adequacy ratio and the non-performing loan ratio, have been improving.

Under these circumstances, facilitating regional finance is one of the most important roles of private-sector financial institutions, particularly regional financial institutions. I think that it is important for financial institutions to strive to facilitate the provision of funds further by properly taking risks while conducting appropriate risk management. At the same time, from the viewpoint of keeping the stability of the credit system and enabling the exercise of the financial intermediary function, it is essential that private-sector financial institutions maintain sound financial conditions. The role of financial regulation is to encourage private-sector financial institutions to meet these two requirements. The FSA will make active efforts to meticulously grasp the actual state of regional finance and to create a virtuous cycle in which the maintenance of sound financial conditions of financial institutions leads to smooth provisions of funds to SMEs.

Q.

I hear that the Prime Minister immediately instructed Minister for Economic and Fiscal Policy Yosano to consider a comprehensive package of economic measures. I expect that the FSA will accordingly consider what measures to take in order to facilitate financing for SMEs. Has Minister Motegi issued any specific instructions for the FSA staff to follow, such as an instruction for a study on possible economic measures?

A.

We have not so far received specific instructions from him. Since Saturday (August 2), he has repeatedly stressed the importance of financing for SMEs, so if he issues instructions in this regard, we are resolved to quickly start studying possible measures with our utmost efforts.

Since downside risks for the economy are growing and starting to materialize amid the surge in the prices of crude oil and raw materials, as I said earlier, the FSA recognizes that SMEs face severe business conditions.

In this situation, we believe that facilitating financing for SMEs is one of the most important roles of private-sector financial institutions, so we will work hard with the resolve that I spoke of earlier.

Q.

Is there anything specific that the FSA can do to encourage smooth financing for SMEs? What you have told us seems to suggest that it is difficult to ensure smooth financing for SMEs and the maintenance of financial institutions’ sound financial conditions amid the increasing downside risks for the economy, and that an increase in loans to SMEs may affect financial health. Could you elaborate on the measures the FSA is considering in this delicate situation it faces as a regulator?

A.

We will need to work on specifics from now on. We will report to you when details have been arranged.

I think that the maintenance of sound financial conditions and the enhancement of the financial intermediary functions are not necessarily incompatible with each other. A financial institution with a sound financial condition and sufficient capital will be able to take risks properly. If the financial institution conducts appropriate risk management while taking risks, it will be able to limit the amount of non-performing loans, through quick action. If this approach works well, it will be able to take greater risks while maintaining sound financial conditions. The essence of relationship banking is providing advice and support for the management of borrowers in addition to extending loans, rather than merely increasing exposures. This combination of services may help to improve the business conditions of the borrower companies or stem the deterioration of the conditions. In that way, I hope, a virtuous cycle will work so that financial institutions themselves can maintain sound financial conditions.

If a financial institution expands its exposures and takes risks without conducting appropriate risk management, non-performing loans will increase over time; this is a development that will erode its capital and make it difficult to take new risks, thereby constraining the exercise of its financial intermediary function. This is a vicious cycle. We should aim to avoid the vicious cycle and develop the virtuous one.

In the real world, it is unlikely that we see only the virtuous cycle. However, I hope that regional financial institutions, which have regained some degree of financial health, will strive to fulfill their financial intermediary role by exercising their resourcefulness and expertise so as to suit the circumstances of their regions and individual borrower companies.

Q.

On Friday, insurance companies submitted reports on their improvement plans. Could you tell me about the points you will pay close attention to and about the matters you put priority on, with regard to the prevention of the recurrence (of the non-payment of insurance claims)?

A.

On August 1, the 10 companies that had been ordered to make business improvements submitted business improvement plans to the FSA. Although improvement plans vary from company to company, there are several notable common elements. First, the companies generally plan to introduce a system of regularly reporting the occurrence status of non-payments, and the analysis of the cause to the management team from the viewpoint of improving and strengthening governance. Secondly, they plan to increase the audit division staff and conduct special audits focusing on cases of non-payment from the viewpoint of improving and strengthening the internal audit system. Thirdly, they plan to introduce an automated system for keeping track of multiple contracts with the same customer and an electronic medical certificate system from the viewpoint of preventing the recurrence of non-payment.

The FSA believes it is most important that the companies take responsibility for the steady implementation of the measures included in their business improvement plans, and intends to encourage them to have improvement processes established throughout their organization by keeping a close watch on the implementation.

(End)