Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

December 8, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

The Liberal Democratic Party’s Research Commission on the Tax System has decided to postpone a plan to establish a tax-exemption scheme for dividends received by small-lot investors in the fiscal 2009 tax reform. The commission has apparently concluded that it would be difficult to introduce the scheme at an early date because it would take time for securities companies to make necessary modifications to their computer systems. How do you view the commission’s decision?

A.

I understand that the commission is continuing to debate the fiscal 2009 tax reform, including the establishment of the preferential tax scheme for small-lot investments that you mentioned.

We have requested the establishment of this preferential tax scheme from the viewpoint of broadening the base of participants in the securities market. This measure is also included in the “Economic Policy Package: Measures to Support People’s Daily Lives,” which was decided by the government and the ruling parties on October 30.

The FSA (Financial Services Agency) intends to continue efforts to obtain the understanding of the relevant parties in order to put this measure into practice.

Q.

A forum for an exchange of views about the facilitation of financing for small and medium-size enterprises (SMEs) was held recently. I hear that after the press left the conference room, there was an active exchange of views, with Minister Nakagawa giving strong words of encouragement to financial industry officials. How do you view the current state of the financial intermediary function of financial institutions in light of what you heard from the financial industry at this forum?

A.

First, regarding the current situation, the balance of outstanding loans provided by all Japanese banks as of the end of November was up 4.4% compared with the same month of the previous year, according to data announced by the Japanese Bankers Association on Friday, December 5. It has been pointed out that behind the rise is major companies’ shift to borrowing from banks as a fund source amid the deterioration of the environment for fund-raising through corporate bonds (commercial paper).

The business condition for SMEs is severe in the current tough economic situation, with the balance of outstanding loans provided by Japanese banks to SMEs continuing to decline year-on-year. As a result, many SMEs are concerned about their fund-raising prospect and the economic condition, as I understand it.

Therefore, the FSA has implemented measures such as establishing a opinion-collection system under which the collected opinions are directly conveyed to the Minister for Financial Services, clarifying the treatment of loans for which lending terms have been revised but which are not deemed as so-called restructured loans, expanding the scope of such loans and partially relaxing the capital adequacy requirement in order to avoid a decrease in financial institutions’ lending capacity.

Under these circumstances, on December 3, we held a forum in which Minister Nakagawa exchanged views with the representatives of financial institutions and requested them to help to facilitate financing for SMEs ahead of the season of strong demand for year-end funds.

In any case, in light of the current situation, I believe that it is increasingly important that financial institutions actively exercise their financial intermediary function in an appropriate manner. For its part, the FSA intends to continue efforts to ensure that financial institutions exercise their financial intermediary function.

Q.

There is speculation that the bill for revising the Act on Special Measures for Strengthening Financial Functions may be enacted this weekend, although the schedule has not been finalized. Could you tell me when the new law is likely to enter force - will it be likely by the end of the year or not - if the bill is enacted this week?

A.

As your question directly concerns the timing of the bill’s enactment and the bill is still under deliberations in the Diet, I would like to refrain from making comments. In any case, the FSA is hoping for an early enactment, as I have said over and over again.

As for the bill’s enforcement following its enactment, if the bill is passed, I believe that it is important for the FSA to quickly implement necessary procedures, such as drawing up a relevant Cabinet Office ordinance, so as to put the new law into force as soon as possible. In addition, it is important to raise public awareness of the new recapitalization scheme so as to ensure smooth enforcement of the new law.

Q.

Am I correct in understanding that it will take around one month?

A.

The most important thing for the FSA to do is to make maximum efforts to put the bill into force as soon as possible.

Q.

I would also like to ask you about the Act on Special Measures for Strengthening Financial Functions on the premise of the bill’s enactment. Compared with the existing law, the new law relaxes the application requirements related to management responsibility because of the need to facilitate financing for SMEs. I think that the new law is more likely to create moral hazards than the existing law and the prevention of moral hazards depends largely on how the FSA operates the recapitalization scheme. Could you tell me how the FSA intends to operate the scheme in order to prevent moral hazards and how it intends to ensure the prevention?

A.

If we receive an application for the injection of public funds, of course, we will implement necessary procedures after asking for the submission of various documents and carefully examining the reason for the application, the management condition of the applicant bank, and its plan for increasing loans to SMEs. In addition, as you know, a final decision will be made after deliberations by the Examination Board, a panel of outside experts, so I expect that the prevention of moral hazards will be naturally taken into consideration during the process.

In Diet deliberations, too, there is an awareness that it is necessary to take measures to counter the adverse effects of external factors on the soundness of financial institutions’ financial conditions, including the strains in local economies caused by the current financial crisis and an increase in non-performing loans that financial institutions operating in local economies are facing, and prevent a significant erosion of financial institutions’ lending capacity and their financial intermediary function. To perform these tasks is the purpose of this bill. So, I believe that it is important to screen applications so as to detect cases in which the soundness of the applicant’s financial condition has declined obviously because of lax management practices. I suppose that the partial revision of the bill that was made during the deliberations at the House of Representatives is intended for this purpose.

Q.

I have another question about the Act on Special Measures for Strengthening Financial Functions. The new law is under deliberation as a means to strengthen the financial intermediary function, while the existing law includes a provision that would promote mergers, so I suppose that it is meant to strengthen the functions of the financial system. Am I correct in understanding that the new law, which is a provisional law to remain in effect for three years, will be enforced for the purpose of strengthening the financial intermediary function throughout the three-year period?

A.

I believe that the existing law is the same as the new law in that it is intended to strengthen the financial system and the financial functions of the banking sector. It will help banks strengthen their management foundation through the expansion of their capital and establish a framework for providing a diverse range of financial services in an effective and efficient manner. From this viewpoint, recapitalization using public funds can be regarded as a last-resort safety net, but financial institutions should also make various efforts on a voluntary basis. The “various efforts” include business integration and restructuring moves. In this sense, if financial institutions’ management and business foundation is strengthened through business integration at the same time as the injection of public funds is carried out, it may lead to the strengthening of the financial intermediary function. Therefore, from the perspective of the overall purpose of this law, which is to strengthen the financial intermediary function, the possibility of a business integration being combined with the injection of public funds is not ruled out. Furthermore, if such a combination is expected to bring about benefits as a voluntary measure, it should be strongly welcomed.

Q.

Regarding the restriction on short selling, which may have already been mentioned in the previous press conference, Minister Nakagawa visited the Tokyo Stock Exchange (TSE) today and exchanged views with the representatives of the securities industry, who pointed out practical difficulties regarding the relevant Cabinet Office ordinance, which has been subjected to the public comment process, and called for improvement. Could you tell me again about the FSA’s stance on this?

A.

Today, Minister Nakagawa visited the TSE and exchanged views with market participants. I hear that the restriction on short selling was among the issues discussed at that occasion. Regarding this restriction, the public comment process was implemented from November 18 to 25 to solicit opinions about matters such as the clarification of the confirmation procedure to be followed by securities companies, as you know. We will make modifications to the Cabinet Office ordinance in light of the collected opinions. In doing so, as I said earlier, it is important to fully take into consideration the need to ensure the effectiveness of the restriction as well as the need to ensure the smooth implementation of practical work procedures by securities companies.

(End)