Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

(Excerpt)

September 1, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statement to make.

[Questions and Answers]

Q.

Late last week, the FSA (Financial Services Agency) came up with its fiscal 2009 budget requests and requests regarding tax revision. The budget requests included an increase of 195 employees, a similar increase to the one requested in the previous year, while the tax revision requests included the establishment of a bold scheme that provides tax exemption to small-lot investors and elderly investors. Could you tell me why and for what purpose you are making these requests?

A.

First, regarding the budget requests, we have set forth four priority items. The first is to enhance the framework for international cooperation, and reflects the growing importance of our close cooperation with overseas supervisory authorities, as shown by the response to the global market turmoil that was induced by the subprime mortgage problem. The second is to enhance the framework for recognizing and identifying various risks inherent in the financial system and using the findings for our financial regulation. The third is to strengthen market surveillance in order to steadily implement the Better Market Initiative and establish reliable and vibrant markets. The fourth is to improve the framework for implementing further measures to protect users of financial services.

Specifically, we are requesting a total increase of around 195 employees, including around 20 for the enhancement of international cooperation, around 45 for the recognition and identification of risks and the use of the findings, around 95 for the strengthening of market surveillance, and around 35 for the improvement of the framework for implementing measures to protect users.

The budget requests also include funds totaling 23.1 billion yen, which will mainly cover expenses related to an increase in the number of employees intended to meet new demand for administrative services, and expenses for improving information systems in order to enhance cooperation with overseas authorities, strengthen market surveillance, improve convenience for users and increase the efficiency of operations.

As for tax revision, we are requesting tax measures that are necessary from the viewpoint of promoting a shift "from savings to investment" and creating a favorable environment for strengthening the competitiveness of Japan's financial and capital markets. As you know, financial assets held by Japanese individuals amount to 1,500 trillion yen. A breakdown by asset type shows that cash and deposits account for a very large portion, 52% of these assets, while the ratio of stocks and investment trusts remain low, around 9%. One notable thing when we look at these assets by type of asset holder is that the size of the younger generations' investment in stock investment trusts, as well as the size of their overall financial assets, is small. This underscores the importance of encouraging the buildup of financial assets for the future from a long-term perspective. Another notable thing is that elderly people account for 70% of the people investing in stock investment trusts. As family interest income has decreased in recent years while dividend income has increased, financial investment is becoming increasingly important as a "second pension plan." In light of this situation, as part of our efforts to promote a shift "from savings to investment," we think it is important to adopt preferential measures for small-lot, long-term investment and investment by elderly people. Therefore, we are requesting tax revisions centering on the establishment of the Japanese version of the ISA (Individual Savings Account: a tax exemption scheme for small-lot, long-term investment) and the introduction of tax exemption for investment by elderly people.

Q.

Next month, Shokochukin Bank and Development Bank of Japan will be converted into stock companies as part of the reform of the government's policy-based finance, moving toward full privatization. In addition, National Life Finance Corporation and other organizations will be integrated to create Japan Finance Corporation. Could you tell me specifically how the FSA plans to respond to these moves, in its capacity as the supervisor of the financial sector, and when it will take action?

A.

Although the FSA does not have authority over the entire reform of policy-based finance, I will reply to your question in our capacity as the regulator of private-sector financial affairs.

As you know, the reform of policy-based finance is intended to drastically revise the functions of the existing policy-based financial institutions and realign them.

Shokochukin will be converted from a cooperative institution into a stock company on October 1 this year, and I understand that it will be fully privatized in about five to seven years, with Shokochukin shares owned by the government to be released over this period. In October and beyond, the FSA, together with the Ministry of Economy, Trade and Industry and the Ministry of Finance, will maintain jurisdiction over Shokochukin.

Development Bank of Japan will be dissolved on October 1, and a stock company with the same name will be immediately established. I understand that the new bank will be fully privatized in about five to seven years from the establishment, with shares owned by the government to be released over this period. Under the law that governs the new bank, the FSA's involvement with the bank will be in principle limited to commissioned inspection of its risk management until it starts taking deposits. I hear that the new bank will become a registered financial institution under the Financial Instruments and Exchange Act.

The FSA intends to properly supervise Shokochukin and hopes that Shokochukin and Development Bank of Japan, in their new capacities as private financial institutions, will contribute to the stability and vitality of the entire financial system and to the improvement of convenience for users, through their competition with existing financial institutions.

As the FSA does not have jurisdiction over Japan Finance Corporation, I should refrain from commenting on it. However, generally speaking, I believe it is important for Japan Finance Corporation to supplement the functions of private financial institutions and contribute to the development of the national economy and the financial system.

Q.

Some people take a negative view of the FSA's request for tax breaks for securities investment, saying their implementation, including necessary computer system modifications, would be difficult. Could you tell me how the FSA plans to proceed with necessary adjustments?

A.

As usual, the ruling parties will hold debate with a view to reaching a conclusion by the end of the year, and it is important that the FSA, as well as the Japan Securities Dealers Association (JSDA) and other industry groups, maintain communications with them during this process. Of course, we expect that discussions with the Ministry of Finance, which is responsible for tax affairs, will also be held.

In this respect, I think that feasibility from the practical viewpoint of securities companies - namely, the need to make computer system modifications - is an important factor, as you pointed out. Therefore, we will need to hold discussions on this matter with the JSDA and other relevant parties. I know that some people have warned of the possibility of the securities tax system becoming too complex, so I believe that it is important to consider keeping the tax system as simple as possible and making it effective in improving the convenience for investors.

Q.

How do you assess the comprehensive economic package worked out by the government last Friday, which included expenditures of 400 billion yen for facilitating the financing for small- and medium-size enterprises (SMEs)? Also, how will the FSA act in relation to this?

A.

I suppose that the amount you mentioned concerns mainly the government's policy-based finance.

In any case, under the comprehensive package of measures to ensure life security, which was adopted last Friday, the FSA intends to make as much contribution as possible to facilitating financing for SMEs in its capacity as the regulator of private financial institutions." Specifically, the package includes four measures concerning the FSA, which are related to the facilitation of financing for SMEs. The first is carefully examining the current status of financing for SMEs and conducting follow-up checks, and the second is requesting financial institutions to facilitate financing for SMEs. The third is supporting efforts to strengthen the capital base of SMEs and promote business rehabilitation, and the fourth is further improving the conduct of inspections in ways to encourage financial institutions to exercise their financial intermediary function.

Facilitating financing for SMEs is, in the first place, a very important task for deposit-taking financial institutions and other institutions with the financial intermediary function. I believe that it is important to enhance measures to facilitate the financing for SMEs, particularly at a time when they find it difficult to pass additional costs caused by the surging crude oil and raw materials prices to their customers. In this sense, the FSA intends to implement the measures included in the economic package in an effective manner by fully cooperating with the Local Finance Bureaus.

Q.

There was a media report that Aozora Bank will revise its earnings projection downward and slip into the red in the fiscal first half ending in September. Do you have any factual information regarding this? Also, in light of the impact of the subprime mortgage problem, which is seen as a factor behind Aozora Bank's losses, how do you assess the state of Japan's financial system?

A.

I know of the media report that you mentioned. However, I am not aware of any concrete action in this regard. In any case, as this concerns the management of an individual bank, I should refrain from making a comment.

I think that tension remains in the global financial markets, as the market turmoil triggered by the subprime mortgage problem is still continuing, mainly in the United States and Europe. The pattern of financial institutions recognizing losses resulting from this problem in each fiscal term and reflecting them in their financial results will probably continue around the world for a while. Under these circumstances, Japan's financial sector's exposure to subprime-related products and other similar high-risk assets has been limited, compared with the exposure of U.S. and European financial institutions, as I have been saying. In this respect, the FSA compiled specific figures regarding subprime-related securitization products. For the fiscal year that ended in March, the FSA also compiled and announced figures regarding securitization products other than subprime-related ones. In light of the size of Japanese financial institutions' total exposure and the scale of losses resulting from the exposure, the subprime mortgage problem is unlikely to directly affect Japan's financial sector in ways that undermine the soundness of the country's financial system, as I have already explained to you. My view on this point remains unchanged. In any case, although there are some positive developments regarding the global financial market turmoil, there are still a number of negative factors. Therefore, the FSA will keep a close watch on future developments with a high level of vigilance while maintaining cooperation and exchanging information with other financial authorities in Japan and abroad.

Q.

I have an additional question regarding the securities tax system. You earlier mentioned warnings of the possibility of the tax system becoming too complex. The burden of making a tax declaration has been cited as an element of the complexity. Under the tax revision last year, investors earning profits of 5 million yen or more from the sale of stocks or receiving stock dividends of one million yen or more are already required to make a tax declaration, thus bearing the burden of following paperwork procedures. This time, elderly people are also expected to be required to apply for a tax refund in order to benefit from tax exemption. Do you have any solution in mind that would simplify the tax system from the viewpoint of easing the burden of paperwork?

A.

Specific procedures regarding tax exemption and reduction that you mentioned will be decided in discussions that will be concluded by the end of the year. A broad outline of the tax system and specific procedures to be followed by taxpayers must be considered in a comprehensive manner, so the discussions will need to be held with due consideration of the need to seek a balance between the two so that an appropriate compromise can be reached.

Q.

I have two questions regarding a shift to a paperless stock certificate system. I hear that a shareholder transfer system was tested today. Could you tell me how you view the progress made in the combined efforts of the public and private sectors to prepare for the shift? Also, when will you make a final decision as to whether to implement the shift on January 5 next year as scheduled?

A.

The shift to a paperless stock certificate system is a very important step toward increasing the reliability and efficiency of Japan's financial and capital markets as a whole, so the FSA puts very high priority on making sure to implement the shift, and our stance on this point will remain steadfast. In order to steadily implement the shift without any major disruption, the FSA, industry groups and the Japan Securities Depository Center, which directly handles paperless stock certificates, as well as securities companies that manage accounts, are closely cooperating with each other in examining check items and making preparations. The FSA has renewed its request for industry groups and securities companies to check their status of preparation and for the top management to be directly involved in the preparation process and to make sure that all various necessary tests are completed. For its part, the FSA plans to take steps such as conducting on-site follow-ups on the preparations.

As for the timing of the final decision of whether to give the go-ahead to the implementation of the shift as scheduled, we have no intention for the moment to alter the schedule. It is important for us to calmly proceed with preparations and implement the shift according to schedule.

(End)