Provisional translation

Press Conference by FSA Commissioner Takafumi Sato

December 15, 2008

[Opening Remarks by FSA Commissioner Sato]

I do not have any particular statements to make.

[Questions and Answers]

Q.

The revised Act on Special Measures for Strengthening Financial Functions was enacted on December 12. How do you feel about this? Minister Nakagawa said at a press conference on the evening of December 12 that he would like to put this act into force this week. Could you tell me about the enforcement schedule?

A.

The revised Act on Special Measures for Strengthening Financial Functions was enacted on December 12, Friday. We would like to express our deep appreciation for the contributions made by the relevant parties to the enactment.

As you know, the revised act is aimed at supporting local economies and small and medium-size enterprises (SMEs), which face severe conditions, by strengthening the financial intermediary function of financial institutions through capital injection by the government. I believe that this will play an important role as the backbone of the various measures so far taken and financial institutions’ efforts.

We will try to complete necessary procedures, such as drafting and revising relevant cabinet orders and Cabinet Office ordinances, without any delay so that the capital injection scheme will be made available quickly. Although a specific enforcement date is still under consideration within the government, the FSA (Financial Services Agency) has Wednesday, December 17, as a likely enforcement date.

Q.

Regarding the revised Act on Special Measures for Strengthening Financial Functions, the media has reported that some regional banks have expressed their hopes for capital injection under this act. On the other hand, the decrease in loans to SMEs apparently reflects the shrinking fund demand from local companies resulting from structural regional problems, such as the aging of society, coupled with the ongoing financial crisis, although financial institutions’ moves to curb loans may be part of the cause. Could you tell me about your assessment of the current conditions of local economies and about how you intend to operate the revised Act on Special Measures for Strengthening Financial Functions effectively?

A.

As you know, the turmoil in the global financial markets caused by the U.S. subprime mortgage problem has started to affect Japan’s financial sector as well as the real economy and the stock market. I understand that because of these changes in external environments, local economies and SMEs face very severe conditions.

According to the results of a questionnaire survey conducted in November with local chambers of commerce and industry through Local Finance Bureaus across Japan, which were announced on December 12, the business sentiment of SMEs have generally soured compared with the previous survey (conducted in August) due to factors such as sales declines. The fund-raising situation has also become more severe compared with the previous survey. The greatest causes of this are, as you suggested in your question, slumping sales and the slow movement of inventories. At the same time, an increased ratio of companies cited financial institutions’ lending stances and lending terms.

Under these severe economic conditions, I believe that financial institutions need to more actively exercise their financial intermediary function in a more appropriate manner. With matters like this in mind, we are implementing procedures related to relevant cabinet orders and Cabinet Office ordinances so that we can put into force the revised Act on Special Measures for Strengthening Financial Functions by the middle of this week. In addition, we will hold briefings regarding this capital injection scheme for financial institutions across Japan to ensure thorough awareness of this scheme. Furthermore, we will actively call on relevant organizations to consider using this scheme.

I hope that financial institutions will consider actively using this scheme so that they can fully exercise their financial intermediary functions as expected by SMEs and other borrower companies.

Q.

I hear that it is becoming more and more difficult for companies to raise funds through the issuance of corporate bonds and commercial paper (CP). How do you view the year-end fund-raising situation for companies? Also, while I understand the additional economic package calls on financial institutions to pay special care to the fund-raising situation, is there any other measure under consideration in relation to the fund-raising situation for companies?

A.

As for the financing condition for companies at the end of the calendar and fiscal years, the condition for SMEs is as I described in my reply to the previous question. For major companies, also, the environment for the issuance of corporate bonds and CP has deteriorated recently, squeezing corporate financing. In light of this situation, on Friday, the Prime Minister announced emergency measures to protect the people’s daily lives, which focused on facilitating corporate financing as one of the top priority matters. The FSA has repeatedly asked financial institutions to facilitate the supply of funds and plans to ask them again to pay special care to corporate financing at the end of this year or at the beginning of the new year. In this context, I believe that it is necessary to carefully watch the fund-raising situation for not only SMEs but also for major companies. I understand that some people have pointed out major companies’ shift to borrowing from banks as a fund source amid the deterioration in the environment for the issuance of corporate bonds and CP. It is important that the financial system and the financial markets as a whole exercise the financial intermediary function properly, with both market-based direct financing and bank loan-based indirect financing functioning smoothly. In relation to this, the measures announced on Friday included the initiation of anti-crisis operations backed by policy-based finance, such as the purchase of CP. We will also keep a close watch on the trend of market-based direct financing.

Q.

Regarding the revised Act on Special Measures for Strengthening Financial Functions, which will be put into effect on December 17, I would like to confirm some points related to the flow of procedures from the application to the capital injection. Are you considering setting a deadline for accepting applications as the United States does under the TAAP (capital injection program) or screening applications as they come at random times? If the fund-raising situation at the end of the calendar and fiscal years is taken into consideration, I think that it may be reasonable to set a deadline.

A.

The application deadline under this scheme is March 2012. First of all, the FSA, together with Local Finance Bureaus - we held an emergency meeting of Local Finance Bureau Directors-General today - will hold briefings for financial institutions across Japan to ensure in-depth understanding of the contents, purpose and usage method of this scheme. At the same time, as the end of the year is approaching, we will ask financial institutions to exercise their financial intermediary function and make special efforts to facilitate year-end financing.

Before this, we will of course draw up and revise relevant cabinet orders and Cabinet Office ordinances and use them as the basis of our briefings. I hope that managers of financial institutions will engage in forward-looking-management while making efforts to facilitate financing for SMEs. As the market volatility has increased very much amid the severe conditions of the real economy and the global market turmoil, I hope the managers will conduct management with a forward-looking vision as to what kind of risks their financial institutions will be exposed to and how their institutions can develop their businesses half a year, one year and two years from now. At the same time, they should properly exercise their financial intermediary function for local SMEs. Their capital policies naturally reflect their management decisions, and I believe that an increasing number of financial institutions are highly likely to decide to strengthen their capital bases as a result of such forward-looking thinking, with some of them finding it difficult to raise funds from the market. The revised Act on Special Measures for Strengthening Financial Functions is intended as a preparation for such a situation, so I hope that financial institutions will actively use the capital injection scheme.

As we ask financial institutions to use the scheme, we should not guess how much capital injection will be requested or when applications will be filed, so we will deal with the matter mentioned in your question with due consideration of the overall situation carefully. Nevertheless, under the current circumstances, I would like financial institutions to act quickly, and the authorities must also act quickly.

Q.

If this act is put into force on Wednesday, will it be possible in theory to implement capital injection by the end of the year? While time is necessary for deliberation by financial institutions and screening by the authorities, it has been pointed out that the effect of capital injection will be doubtful unless the injection is made by the end of the year so that it can be directly used to meet year-end fund needs. How quickly can the screening be completed?

A.

The important thing to do is to support year-end fund-raising by SMEs by ensuring that financial institutions properly provide loans to them by the end of the year. An increased burden from the deterioration of the quality of new loans thus provided or outstanding loans is a problem that may arise later. It is important that financial institutions increase their capital based on management decisions made in anticipation of future developments. Thus, if we are to focus on the year-end fund-raising situation, what is important is that financial institutions properly provide loans. Of course, it is necessary to follow various procedures involved in management decision-making, the submission of an application and the injection of capital, and at a minimum, it will take some time for these procedures to be completed. In any case, we must try to act as quickly as possible under the given conditions.

Q.

I have a question about details related to the Act on Special Measures for Strengthening Financial Functions. First, how will you hold briefings through Local Finance Bureaus? Will each bureau hold one briefing starting early next year, for example? Secondly, if the act is to be put into force on Wednesday, I suppose that the public comment procedure for relevant cabinet orders and Cabinet Office ordinances will be skipped. Am I correct in understanding that the procedure will be skipped based on the legal provision that allows exemption from the requirement for the public comment procedure in emergency cases?

A.

First, as for briefings to be held across Japan, we have such a sense of urgency that we cannot wait until the beginning of the new year. Of course, I believe that briefings will start by the end of the year. As for the public comment procedure, as you mentioned in your question, we recognize the need to put this act into force quickly under these severe economic conditions. So, we have concluded that the current situation fits the case specified under Article 39(4)(i) of the Administrative Procedure Act, which reads “when it would be difficult to follow the procedure provided for in paragraph because the urgent establishment of the Administrative Orders, etc. is necessary for the public interest” and have decided to skip the public comment procedure. In addition, this scheme provides a number of financial institutions with access to a new option, rather than imposing any new universal obligation on financial institutions, so, if we weigh the importance of the requirement of the public comment procedure against the need to act quickly, we believe that the latter is more important.

Q.

Although the quota for capital injection under the revised Act on Special Measures for Strengthening Financial Functions was initially expected to be set at around 2 trillion yen, it was decided on Friday that funds totaling 12 trillion yen will be allocated. Could you explain this change? Also, do you think that the allocation of 12 trillion yen for a three-year period is necessary and sufficient?

A.

Regarding the quota for capital injection under the Act on Special Measures for Strengthening Financial Functions, the economic package that was announced in October called for the establishment of a sufficient quota, as you know. In line with this call, the quota has been expanded by 10 trillion yen to 12 trillion yen amid the ongoing turmoil in the global financial market so that we can deal with any situation.

For your information, the quota of 12 trillion almost matches the amount of capital injected so far since the financial crisis of 1997-98, which comes to 12.4 trillion yen. Assuming that the whole of the 12 trillion yen is used - although the full amount may not necessarily be used - to recapitalize half of all deposit-taking financial institutions in Japan, their ratio of Tier 1 core capital would rise by 4 percentage points. The amount of Tier 1 capital at those financial institutions will increase by 50%. Thus, the quota has been increased to an amount sufficient to deal with a fairly high level of volatility. The 10-trillion-yen increase in the quota in the second supplementary budget of the current fiscal year also takes into consideration the remaining period of fiscal 2008, namely the period until the end of March. While all of the 12 trillion yen could be used up by the end of March 2009, the quota is to be reviewed each fiscal year, so we are thinking of requesting 12 trillion yen again in the initial budget for fiscal 2009. You may understand that 12 trillion will be allocated each fiscal year. Of course, the quota for fiscal 2010 and later will be considered in the relevant budget compilation process.

Q.

I would like to change the subject to Nomura Holdings’ announcement today of the balance of its outstanding investments in a hedge fund managed by Mr. Bernard Madoff, who was arrested in a case of enormous fraud in the United States. Could you tell me how the FSA views this case, including its estimate of the impact on Japanese financial institutions other than Nomura?

A.

I am aware of media reports that the U.S. Federal Bureau of Investigation has arrested Mr. Madoff and that financial damage related to hedge funds in which Mr. Madoff is involved could reach as high as 50 billion dollars.

Regarding this case, Nomura Holdings has issued a press release to the effect that its exposure to Mr. Madoff is 27.5 billion yen, a size that is immaterial in light of its capital base.

At this time, we do not have information indicating that any Japanese financial institution has huge exposure in this case. At any rate, we will keep a close watch on the impact that this case may have on the soundness of Japanese financial institutions’ financial conditions.

(End)