Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

August 25, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

I will ask you two questions.

Regarding tax revisions, there have been media reports that the FSA (Financial Services Agency) will request tax exemptions for elderly people's stock dividends and profits from stock sales. I hear that in a speech earlier today, Minister Motegi said that the FSA is considering preferential treatment for small-lot investors and elderly investors. Could you tell me the status of the FSA's deliberations on this matter and explain the differences between the FSA's proposal and a proposal currently under consideration by the LDP (Liberal Democratic Party) to create a society in which elderly people can remain healthy and continue working, which I think is similar to the FSA's proposal?

A.

We are scheduled to submit our requests regarding tax revisions at the end of August. The requests will have two pillars. One is providing preferential treatment for small-lot investors' investments in listed stocks, in amounts up to a prescribed annual limit, in order to expand this class of investors. The other is providing preferential treatment for dividends and profits from the sale of stocks received by elderly people, from the viewpoint of financial security for post-retirement life. However, as we are still putting the finishing touches on our proposal, I would like to refrain from commenting in any further detail.

The items announced by the LDP's joint committee that are being considered in order to enhance elderly people's security and vitality included a proposal for deliberations on the establishment of a scheme to provide preferential treatment for investments by elderly people. As I said just now, we are putting the finishing touches on our requests regarding tax revisions, so I would like to refrain from comparing our requests with the LDP's proposal.

In any case, the basic concept of our requests regarding tax revisions for fiscal 2009 is to strive to provide appropriate opportunities for the investment of the 1,500 trillion yen of financial assets held by Japanese individuals, in order to promote a broad shift "from savings to investment."

Q.

In a monthly report (Monthly Report of Recent Economic and Financial Developments) announced by the BOJ (Bank of Japan) a few days ago, the BOJ lowered its assessment of economic conditions, describing them as "sluggish," compared with "slowing further" in the previous report. Could you tell me how the FSA assesses current economic conditions and how they will affect the management of financial institutions?

A.

I know that at a Monetary Policy Meeting on August 19, the BOJ adopted a "Statement on Monetary Policy," which noted that "economic growth has been sluggish against the backdrop of high energy and materials prices and weaker growth in exports."

The FSA is not responsible for providing an assessment of overall economic conditions and does not have the authority to do so. In any case, the government offered the basic assessment in its Monthly Economic Report for August that the economy is "weakening" and, regarding the future outlook, pointed out that "weak movements are likely to continue for the time being." It also noted that "attention should be given to further downside risks that could stem from developments of the U.S. economy, the stock and exchange markets, and oil prices."

If I am to comment from the FSA's standpoint as the regulator of the financial sector, one example would be the financial results of Japanese banks for the April-June quarter, which showed that their profitability generally weakened as they faced an increase in credit-related expenses, such as the cost of disposing of non-performing loans. One factor behind this situation is the continued turmoil in the global financial market induced by the subprime mortgage problem. Also, there is no doubt that small- and medium-sized enterprises (SMEs) face increasingly difficult business conditions amid the increasing downside risks for the Japanese economy, which are attributable to the high prices of crude oil and raw materials.

As I have been saying, the exposure of Japanese financial institutions to subprime-related products is small compared with their U.S. and European counterparts. In light of this, I do not expect that the turmoil in the global financial and capital markets will have a serious direct impact on Japan's financial system. Nevertheless, we need to pay close attention to future developments in the financial and capital markets.

Regarding the deterioration in business conditions for SMEs that has come with the deterioration of the state of the real economy, the FSA is ready to contribute as much as possible to a comprehensive economic package intended to ensure safety and security, which the government is currently devising. The FSA will include measures in the plan that may be implemented in order to facilitate financing for SMEs, and carry them out.

Q.

Could you provide us with further details regarding the emergency economic package that you mentioned?

A.

Facilitating financing for struggling SMEs will be one of the pillars of the government's economic package. While I believe that government-affiliated financial institutions have an important role to play in this regard, facilitating the provision of credit by private financial institutions will also be important. The FSA should call attention to this point and make the necessary efforts.

As we have been aware of problems like this, we have been planning to carefully examine whether or not financial institutions are imposing unreasonable curbs on loans. About two weeks ago, senior FSA officials started visiting regions to exchange views with financial institutions and hold hearings with SME borrowers. We also started taking other steps such as renewing our requests for financial institutions to take proper risks when necessary and provide financing for SMEs, while maintaining sound financial conditions and conducting appropriate risk management.

Specifics and further details will probably be decided this week, so I would like you to wait until then.

Q.

You said that senior FSA officials are investigating the current situation. Am I correct in understanding that the situation for regions and SMEs is very severe?

A.

As I have repeatedly said, I believe it is true that the management of SMEs is under pressure from external factors such as the high price of crude oil and the surging prices of raw materials. Therefore, we are maintaining the view that business conditions for SMEs as a whole are severe.

Q.

What is the major cause of the tightening of financial institutions' lending stances, one of the external factors that you mentioned?

A.

We are compiling some statistics regarding whether there has been any change in financial institutions' lending stances. However, I have not come across any data that indicates a tightening of their stances.

Q.

Have you not received any report from senior FSA officials that indicate a tightening of lending stances?

A.

Our investigation is still incomplete, as it has not yet covered all regions. However, of course, I have received reports that some regions and some business sectors face difficult conditions.

Q.

I will ask you about the two pillars that you mentioned in relation to tax revisions. It is difficult to understand how preferential treatment for investments by elderly people relates to the provision of appropriate opportunities for investment. Could you explain in more detail why elderly people, rather than people who need to build up financial assets from now on, should be given preferential treatment?

A.

The provision of appropriate opportunities for investment is a matter that I mentioned when I explained our policy mission of strengthening and invigorating Japan's financial and capital markets. I mentioned it now as I was thinking about the consistency between the tax revision and the policy mission. I expect that the tax revision will mostly converge with the policy mission. The preferential treatment for elderly people that you asked me about is partly based on the idea that the breakdown by age group of the 1,500 trillion yen of financial assets held by individuals should be taken into consideration.

Q.

Don't you think that providing preferential treatment for elderly people because they account for a large portion of those assets is tantamount to providing preferential treatment for the wealthy, an issue over which the tax revision debate had been in a stalemate until last year? Isn't it the FSA's policy mission to increase the affluence of people who aren't wealthy?

A.

On the one hand, when we tackle a policy mission, we must bring about benefits by ensuring that an incentive provided as a policy leads to actual economic action - that is, the policy measure must be effective. On the other hand, while maintaining the effectiveness of the measure, we are giving consideration to accusations of preferential treatment for the wealthy and working on final details in pursuit of a framework that reflects the voices of critics.

Q.

In relation to this issue, in his speech earlier today, Minister Motegi spoke of his wish to use the British ISAs (Individual Savings Accounts), which are intended to encourage investment by individuals, as a model. What is the status of the FSA's deliberations on or study of ISAs?

A.

I suppose that your question concerns what the Minister said in his speech at the Foreign Correspondents' Club of Japan, and possibly - I did not listen to his speech - what he said has something in common with one of the two pillars that I mentioned, namely the provision of preferential treatment for small-lot investors' investments in listed stocks in amounts up to a prescribed annual limit, in order to expand this class of investors. As for specifics, I would like to refrain from making any further comment, since we are still putting on the finishing touches, as I told you earlier.

Q.

From the viewpoint of simplifying the tax system, providing preferential treatment for elderly people and small-lot investors is expected to draw criticism, mainly from the Ministry of Finance, as it appears to make things more complex. What do you think in this regard?

A.

Generally speaking, it is important that tax measures - particularly securities investment-related tax measures - be applied to a wide base, including small-lot investors, so it is essential that the measures be made as easy-to-understand as possible and suit the convenience of investors. In this respect, it is important to make the tax measures realistic. In any case, I expect that discussions on the issue of tax revision will deepen, including with regard to the point that I mentioned just now.

Q.

In relation to the simplicity of tax, I understand that an agreement was reached under last year's tax revision plan on the application of a reduced tax rate to dividends totaling up to one million yen per individual and profits from stock sales totaling up to 5 million yen. Will the FSA request the establishment of a new tax-free bracket in addition to these tax breaks, or will it request their revamping?

A.

As I said the other day in response to a similar question, a conclusion was reached on the securities investment-related tax system at the end of last year. It is important that we consider what to do with the tax system as a whole while maintaining consistency with that conclusion. As for the specifics of our request and details of the relationship between it and last year's tax revision, I would like to refrain from making a comment for now.

Q.

Will the tax cut for small-lot investors be a permanent or provisional measure?

A.

Regarding that point, too, we are putting on the finishing touches at the moment, so I would like to refrain from commenting in any further detail for now.

(End)