Press Conference by the Minister for Financial Services

(Excerpt)

31 August, 2001

Q.

Stock prices are falling dramatically in Japan and in the U.S. What is your opinion on its impact on Japanese banks and other financial institutions?

A.

Banks still have a considerable amount of good-buy stockholdings. It should also be noted that fair value accounting is to be introduced from September 2001 onwards. Thus, lower stock prices inevitably lead to unrealized losses, which have a negative impact on the capital account. In that sense, we are concerned about the undesirable consequences.

Nevertheless, as we have previously stated, stock constituting the Nikkei Average and stock held by banks are extremely different. In terms of ratio, about half of the stock held by banks are linked to the Nikkei Average. We would appreciate it if you could take that into account when analysing the Nikkei Average.

The current stock price level might not be particularly desirable, but it is not extremely grave either. That is our opinion.

Q.

Lately, some observers have mentioned that the low stock prices might be attributable to the ''FSA Shock'', as the disposal of NPLs appear to be staggering according to the Minister's reform schedule announced the other day. What is your position on this?

A.

At the recent meeting of the Council of Economic and Fiscal Policy, we reported the schedule, or put differently, the status of progress in each other's jurisdiction. During the meeting, I announced an estimation, an image of how things are expected to be during and after the three-year intensive adjustment period worked out by the Supervisory Bureau of the Financial Services Agency, based on the belief that it would preferable to give a reasonable idea as to what the solution of the NPL problem means at this stage.

The assumptions are extremely strict: for example, all debts categorized as ''Special Attention'' in industries suffering from structural recession are assumed to shift to ''In Danger of Bankruptcy'' in the following financial year, and land prices are assumed to fall dramatically. These harsh assumptions have been made for the purpose of figuring out what will happen during the intensive adjustment period. As we have been informed in advance that the intensive adjustment period would be tough in that all losses would increase and require absorption by equity capital, we calculated a simulation model based on such harsh assumptions. Despite such strict assumptions, we were able to find out that there would be no problems as far as the disposal of NPLs is concerned.

Another area of interest was Japan's status in three years time following the solution of the NPL problem. We announced the possible status of the NPL ratio and the credit cost ratio, the two yardsticks that had already been released. I acknowledged that everyone has a deep understanding of the situation, with reference to articles published on the following day in recognition of the objectives of our estimation efforts. However, the market's interpretation was that the disposal of NPLs would take as long as 7 years, and the balance of NPLs would gradually decrease during the period. Due to beliefs that NPLs would increase by 0.1 trillion yen in amount, we preferred to state that the NPL situation would be ''more or less the same'', which may have been extremely provocative. We may have led you to think that there would be no progress during the period, or that it would be a time-consuming process.

Looking back on my presentation, I should have been more careful. Whilst we appreciate comments about our estimation being in line with our comments hitherto, I hope that market players would further improve their understanding and interpret our explanation correctly.