Press Conference by the Commissioner

(Excerpt)

9 July, 2001

Q.

Recently, bank and narrow-based stock indices of both the Nikkei and TOPIX have fallen to extreme lows almost on par with the post-bubble years, and stock prices in general are depressed. What kind of impact does this have on the economy, including the management of banks?

A.

The Nikkei average had recovered to around ¥14,000 by the beginning of May after marking a new low for the year in the middle of March. In recent months, however, they have been held down mainly due to two factors: as pointed out by market sources, the impact of Japanese companies revising their estimated profits downward; and the impact of the downturn in the U.S. market.

In addition, as you may know, fair value accounting will be required starting this fiscal year, meaning that surpluses will be affected by falling stock prices. It is therefore fair to say that falling stock prices will affect the management of banks to some degree.

However, as we have previously stated, there is no need to overreact. The Nikkei average was ¥12,999.70 as of the end of March 2001, which is about ¥13,000. A 10% drop in the Nikkei average, to ¥11,700, would reduce the capital adequacy ratio by about 0.5%, according to our calculations. However, as banks' stockholdings are linked to the Nikkei merely for 60% to 70% of the total, the Nikkei would drop by 15% rather than 10%, from ¥13,000 to ¥11,000, if the capital adequacy were to be reduced by 0.5%.

In any case, the potential capital reduction is quite limited: considering that the average capital adequacy ratio of Japan's major banks was 11.7% as of the end of March 2001, the ratio would still be 11.2% even if the Nikkei plunges to ¥11,000.

Q.

Last Friday, Liberal Democratic Party Secretary General Taku Yamasaki stated in a press interview that it was worth considering the injection of additional public funds if necessary. What is the Financial Services Agency's position on the injection of additional public funds, in regard to such a statement?

A.

We do not have any first-hand knowledge about the context in which Mr. Yamazaki made that statement, other than from newspaper reports. Our understanding is that Mr. Yamazaki stated it was worth considering further capital injection if the banks' disposal of non-performing loans as required led to reductions in their capital accounts under the adequate level.

As I have already mentioned in the previous press conference, the Financial Services Agency is currently asking major banks to remove NPLs classified as ''in danger of bankruptcy'' and below from their balance sheets, which amounted to 11.7 trillion yen as of March 2001. Its impact on their capital adequacy ratio will be extremely limited: the reduction would be no more than 0.2% or 0.3%. As the rigorous disposal of non-performing loans by major banks as required by the Financial Services Agency will have limited impact on their capital adequacy ratio at this stage, we do not expect the reduction of the ratio to be significant enough to justify further capital injection.