Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

October 16, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statement to make.

[Questions and Answers]

Q.

Minister Nakagawa has recently announced measures to support the financial market. While there are various views about the significance and effectiveness of the measures, what is your view?

A.

I think that the current global financial turmoil needs to be resolved through international cooperation. Therefore, at the recent G-7 meeting (meeting of the Finance Ministers and central bank governors from the Group of Seven industrialized countries), an agreement was reached that a resolute action should be taken with the use of all available means. Those measures represent Japan's immediate response to the G-7 agreement.

Japan's financial system is stable compared with the systems of the United States and Europe, and we also have a safety net in place. However, because the recent violent movements of stock prices could affect Japan's financial system and real economy, Minister Nakagawa made an announcement immediately after his return from the G-7 meeting, expressing a resolve to take necessary measures quickly. Specifically, the measures include an easing of restrictions on the purchase of own stocks and an enhancement of disclosure of information regarding short selling at stock exchanges, from the viewpoint of stabilizing the market and ensuring its transparency, and these measures have already been implemented. Also under consideration are the facilitation of financing for small- and medium-size enterprises (SMEs) through the enhancement and use of the Act on Special Measures for Strengthening Financial Functions and the extension of the period of government aid for the safety net for life insurance.

In addition, Minister Nakagawa summoned representatives of financial institutions yesterday and requested them to make efforts toward the facilitation of financing. The FSA (Financial Services Agency) hopes that quick and steady implementation of these measures will contribute to an improvement in the conditions of the financial and capital markets and regional economies.

Q.

Regarding the market-supporting measures, Minister Nakagawa has said that he will make a decision on whether to take additional measures in light of the circumstances of the time. At yesterday's meeting for an exchange of views (with the representatives of financial institutions), a regional bank requested a suspension of the application of fair value accounting. Yesterday and today, stock prices dropped sharply in both Japan and the United States, while the government and the ruling parties plan to hold a meeting regarding the economic policy this evening. If additional measures are to be necessary, what kind of measures should they be and when should they be implemented?

A.

As I told you, the current global financial turmoil needs to be resolved through international cooperation, and Japan has announced the measures that are necessary for now. First of all, we would like to properly implement the measures included in Minister Nakagawa's statement.

While Japan's financial system is stable compared with the systems of the United States and Europe, stresses in the global financial markets are continuing to grow, as shown by the recent wild price swings in the stock market, and this has apparently had adverse effects on the real economy on a global scale. In this sense, the FSA needs to keep a close watch on market developments and the state of the real economy while maintaining a high level of vigilance. Furthermore, as indicated in Minister Nakagawa's statement, we will strive to make sure to take appropriate actions in a timely manner if the situation changes.

As for the treatment of fair value accounting, I understand that the Accounting Standards Board of Japan (ASBJ), which happened to hold a meeting today, decided to announce a proposed guideline for internationally consistent interpretation in order to clarify the measurements of fair value, or market value. Regarding fair value measurements, the U.S. Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB), for example, published a guideline for the clarification of the measurements on September 30. The first point of the guideline is that when there is sufficient trading activity, market price should be regarded as fair value. The second point is that when market prices are at extreme levels due to a disorderly market condition or when market prices need to be adjusted significantly, fair value may be estimated based on internal data.

Regarding a media report about the switching of the ownership category of financial products - specifically, switching from the category of ownership for trading purposes to another category, for example - I understand that the ASBJ started deliberations on this issue at today's meeting with a view to ensuring international consistency and developing and applying fair and appropriate accounting standards, following a revision of accounting standards by the International Accounting Standards Board on October 13.

Accounting standards play an extremely important role as a yardstick that helps to diffuse, widely throughout the market, precise information regarding corporate activities, particularly activities of listed companies, and the results of the activities. Therefore, I believe that it is important to maintain the reliability of accounting standards as a whole, including fair value accounting, in terms of transparency, consistency and compatibility. On the other hand, as for the practical application of fair value accounting, the FSA is aware of problems, such as the possibility that in cases where the market is in a state of great turmoil, for example, when the liquidity of financial products to which fair market accounting is applied has dried up with only a very small amount of extraordinary transactions being done, the uniform application of prices observed in market transactions could significantly sway financial statements or cause an extreme deviation from the actual state.

In any case, as I said earlier, I expect that in Japan, the ASBJ will set appropriate accounting standards as necessary, with due consideration of international consistency.

Q.

I would like to ask you about last week's bankruptcy of Yamato Life. I hear that this was caused mainly by a deterioration of the market environment. Market participants have pointed out that there was a very long interval between the previous inspection and the most recent one and suggested that the supervisory authorities should have acted earlier. What is your view in this regard?

A.

Yamato Life filed an application with Tokyo District Court for court-administered rehabilitation procedures on October 10, as it is estimated to have become insolvent as of the end of September 2008. We understand that Yamato Life - whose profit structure was unusual for its dependence on high-risk, high-return securities investment to cover the high cost of the insurance business - has fallen into this situation because of an increase in losses related to its securities holdings caused by the deterioration of the market condition since last year.

The FSA has been striving to properly inspect and supervise insurance companies by conducting appropriate onsite inspections and offsite monitoring regarding the appropriateness of their business operations and financial soundness, with a frequency suited to their circumstances, in accordance with the Insurance Business Act. In particular, since the summer of last year, when the global financial market fell into a state of turmoil as a result of the subprime mortgage problem, the FSA has been keeping a watch on the risk management status of financial institutions, including risk management related to securities investments, with an enhanced level of vigilance. Meanwhile, Yamato Life made its own efforts from the viewpoint of strengthening its financial base, including negotiating a capital tie-up, and the FSA continued to monitor the company's situation through hearings from the viewpoint of protecting policyholders. It is quite regrettable that Yamato Life failed to avoid becoming insolvent as of the end of September. From now on, we will deal with this case in an appropriate manner in relation to the formulation of a rehabilitation plan from the viewpoint of protecting policyholders and other parties concerned.

As for the timing of the inspection, generally speaking, we decide the targets of inspection and the inspection schedule with due consideration of a comprehensive range of factors, including the management conditions of individual financial institutions and the status of voluntary business improvement measures they take, while also taking into consideration the viewpoint of conducting inspection in an efficient and effective manner.

In any case, as stresses remain in the global financial markets, we will continue to closely monitor the conditions of insurance companies, too.

Q.

I will ask you again about the review of fair value accounting. Yesterday, members (of the ASBJ) warned that there will be an impact on financing for SMEs. What is your view on the necessity of reviewing or freezing the application of fair value accounting in light of this situation?

A.

Generally speaking, it is true that if there is a problem with the financial soundness, particularly capital adequacy, of financial institutions such as banks, their risk-taking capability - more specifically, their lending capacity - is affected. On the other hand, as I said earlier, accounting standards serve as an important means to disseminate information regarding the results of listed companies' business operations and financial conditions widely throughout the market, based on a common yardstick. Therefore, it is very important to maintain the consistency, compatibility and reliability of accounting standards. However, as I said earlier in relation to the guideline released on September 30 by the SEC and the FASB, we recognize a problem related to the possibility that when market prices of financial products are at extreme levels due to a disorderly state of the market, for example, corporate financial statements could be significantly swayed, showing substantial volatility, if the market prices are applied. Therefore, although the view that the application of fair value accounting should be frozen has not become dominant, there is awareness of a problem regarding how to apply it. As I already told you, the ASBJ decided today to announce a guideline for internationally consistent interpretation in order to clarify the measurements of market value or fair value.

Q.

As the Act on Special Measures for Strengthening Financial Functions will be enhanced rather than merely revived, Minister Nakagawa has said the act should be more flexibly and actively applied. The existing act attaches conditions to the injection of capital, such as the requirements for banks receiving capital injection to submit management enhancement plans and for senior managers to accept responsibility for being forced to seek additional capital. Compared with the conditions attached under the existing act, what kind of provisions do you expect that a revised act will contain?

A.

Regarding the Act on Special Measures for Strengthening Financial Functions, we are now considering the contents of the bill for revision, including the enhancement of the existing provisions, devoting our full effort to the drafting of the bill. Although we have the matters that you mentioned in mind, I should refrain from commenting on the specifics of the bill. In any case, we will do our utmost to introduce the bill for the revision of the act into the Diet quickly.

Q.

Although you say that the bill is still under consideration, could you tell me what you think of the issue of management responsibility and moral hazards regarding banks that receive capital injection?

A.

As I said earlier, I would like to refrain from making comments because we are still working on the bill.

Q.

The Act on Special Measures for Strengthening Financial Functions expired in March this year, when the subprime mortgage problem had already emerged. Around June, you said financial institutions should strengthen their capital base by raising funds from the private sector and avoid indifferently depending on public funds, if I remember correctly. Over the several months since then, the situation has changed. Could you explain what changes have occurred in the external environment and Japan's financial system in relation to the necessity (of capital injection) for financial soundness?

A.

To put it simply, there have been two changes. As the global financial turmoil has deepened sharply, it has suddenly become difficult to raise private-sector capital in the market, which is a capital raising activity in the proper sense of the word. We may also say that stresses in the market have grown particularly strong since the bankruptcy of Lehman Brothers in September.

The other change concerns regional financial institutions. If regional financial institutions' capital base is strengthened, their risk-taking capacity, which I mentioned earlier, will grow, which is expected to lead to an expansion of their lending capacity. However, the need for SMEs to receive credit provision from regional financial institutions has grown rapidly as the state of regional economies and the conditions of SMEs have worsened significantly, a situation which I think represents a major change.

Q.

We may understand that the approaches of the United States and European countries have converged on using public funds. Europe has adopted full protection of deposits and the United States has offered full protection of funds deposited for settlement purposes, while Japan provides full protection of funds for settlement purposes but protects other deposits only up to 10 million yen (per depositor). Calls are growing, mainly from Nagatacho (Japan's political center), for providing full protection of all deposits. What do you think of the necessity of full deposit protection?

A.

As you pointed out in your question, Japan's deposit insurance system provides full protection of funds deposited for settlement purposes and protects other deposits up to 10 million yen per depositor, with the portion of deposits exceeding the 10-million-yen ceiling to be paid as liquidating dividends. Thus, we have a permanent deposit insurance system that is very robust. I understand that the U.S. package announced yesterday included a similar scheme.

The financial condition of Japan's financial sector as a whole, including deposit-taking financial institutions, remains sound compared with the U.S. and European financial sectors, as I pointed out earlier. So we do not expect for now that Japan will face a situation in which it is forced to take extraordinary measures, such as providing full protection of deposits.

The five measures included in the G-7's action plan included ensuring the robustness of the deposit insurance system. I believe that in this respect, individual countries should also take the most appropriate action in light of the circumstances of their own markets and financial sectors.

Q.

Am I correct in understanding that while a succession of countries have decided to provide government guarantee for interbank loans, Japan will not take such a measure?

A.

I understand that Bank of Japan Governor Shirakawa has recently indicated the view that Japan does not need to take such a measure, and I share that view.

Q.

Regarding stock prices, the Nikkei Average posted the second-biggest daily loss on record today, falling below 9,000. Could you tell me how you view the impact on the financial soundness of Japanese financial institutions and what you think of the possibility of revising the domestic rules on capital requirements, which are somewhat stricter than the U.S. and European rules in that they require (valuation) losses (on stock holdings) to be reflected in Tier 1 capital?

A.

Changes in prices of securities held by banks affect their balance sheets through changes in valuation profits and losses on those holdings. Compared with some time ago, Japanese banks' stock holdings have decreased substantially, so we could say that the impact (of changes in stock prices) on their financial conditions has accordingly declined. On the other hand, the recent wild swings in stock prices make it necessary for us to keep a close watch on the impact on Japanese financial institutions' financial conditions while maintaining a high level of vigilance.

As for the treatment of valuation profits and losses on securities holdings under the capital adequacy regulation, the regulatory framework has been established under an international agreement, so it is necessary to consider this issue from a global perspective.

Q.

Minister Nakagawa's statement's referred to a plan to freeze the sale of government-held stocks. There is also the issue of stock purchases by the Banks' Shareholdings Purchase Corporation. Although you said that Japanese banks' shareholdings have decreased compared with some time ago, what do you think of the necessity for the purchase of banks' stockholdings by this corporation as an additional measure?

A.

Necessity for what purpose?

Q.

Necessity as an additional measure to deal with the financial crisis.

A.

Generally speaking, I believe that in the medium term, the stock price of a listed company will ultimately reflect the business performance of the issuing company and its future prospect, more specifically the present value of future cash flow to be obtained through the ownership of the stock. I think that the stock market is expected to exercise a price formation function that reflects an economic rationality like this.

Q.

Do you mean that the government does not need to purchase stocks held by banks?

A.

I think that we should consider this issue in a calm manner in light of the stock market's basic function that I mentioned now.

(End)