Press Conference by the Commissioner

(Excerpt)

20 August, 2001

Q.

In relation to the statement you have previously made, an IMF report was issued the other day, which mentioned that more public funds would have to be injected if the banks' disposal of non-performing loans lead to reductions in their capital accounts under the adequate level. Could you give us your perspective on the context in which this ''mismatch'' arises between the Japanese government and its foreign counterparts, and the problems associated with it?

A.

As part of the IMF Article IV Consultation, the staff reported to the Board of Directors about the Japanese financial sector, which was subsequently disclosed to the general public. We acknowledge that the report includes such remarks as pointed out by the reporter.

We have been acutely aware of this ''mismatch of perception'' over the past few months, and we are concerned as to how this can be eliminated. We do provide a thorough explanation to foreign visitors, but I believe that the issue rests on how non-performing loans (NPLs) are perceived. There is no universal rule on this, and NPLs, depending on the amount and the content, are classifiable as ''Needs Attention'', ''Special Attention'', ''in Danger of Bankruptcy'', ''De facto Bankrupt'' and ''Bankrupt'', reflecting the status of the debtor in increasing order towards bankruptcy. The rules on how to categorize the debtors are most important here. Japan is in compliance with global standards in that the Financial Services Agency's inspection manual is based on the Japanese Institute of Certified Public Accountants' practicing guidelines to categorize debtors according to global standards. Debtors are grouped by category, and the prospective credit loss rate in each group is calculated based on the percentage of credit losses in the past.

As the NPL issue has received universal attention in the past 2 or 3 years, I believe that everyone has a better understanding of the issue now, including the reporters present today. Yet, market analysts quoted in the IMF report claim that the amount of NPLs is 70 trillion yen or 75 trillion yen, for which provisions are required in the amount of 20 trillion yen or 25 trillion yen. It makes me wonder what kind of rules they applied to arrive at 75 trillion yen.

Indeed, as of March 2000, the amount of loans issued by all depository institutions to entities classified as ''Needs Attention'' and below totaled 150 trillion yen. Numerous market analysts' reports point out that half of that amount has turned into NPLs, hence the figure 75 trillion yen. I'd like to know the basis for arriving at such a conclusion. We place importance on the compliance with strict rules, based on the triple checking mechanism including the self-assessment by banks, external auditing of banks by certified public accountants and inspection by the FSA. According to our calculations in compliance with the same rules as set forth in the FSA's inspection manual, the amount of NPLs was 48 trillion yen as of March 2000. Even though we have explained that NPLs are in the amount of 48 trillion yen, and that the loans issued to entities classified as ''Needs Attention'' and below are not considered NPLs even in the U.S., they have concluded that half of the 150 trillion yen of such loans would turn into NPLs considering future economic prospects. I have no idea as to how they can draw such a conclusion, but that is the case, and they pressure banks to make a provision of 20 trillion yen or 25 trillion yen. Although it is hard to believe that an international organization like the IMF would write so in their report, I think it is due to the fact that the IMF is an institution dedicated to macroeconomics rather than micro-finance. The report even suggests forward-looking provisions, which could be quite controversial in the field of professional accounting.

When there is no guarantee that the economy would improve or deteriorate, a company that increases its reserves assuming that the economy would deteriorate to a certain extent would be, in a sense, breaching its duty owed to shareholders. In other words, if a company eliminates dividends by increasing its reserves that are regarded unnecessary based on accounting standards, its liability to shareholders would become an issue. With this in mind, accounting standards need to be impartial, and the debtor categorization and the provisions must be objective.

The reporter who just asked the question cited the IMF report. Although the latest report cites views by the FSA, it basically quotes remarks made by market analysts.

I believe that it could be irresponsible for a well-respected international organization to issue a report that draws conclusions based on the assembly of market analysts' views. They should thoroughly analyze the situation themselves, and if the provisions turn out to be far too insufficient by the established accounting standards in Japan, they should show the evidence. If they think that Japan's provisions are insufficient as claimed by market analysts or believe that closing the gap would lead to reductions in banks' capital accounts under the adequate level without any evidence, we would like to see them corrected, as our understanding is totally different. Minister's visit may contribute to reducing the gap.

In my opinion, NPLs should not be defined arbitrary. They should be defined based on a rule. In that sense, the amount of NPLs calculated by the FSA, based on the self-assessment of banks according to Japanese accounting standards in compliance with global standards, is the definition -nothing more, nothing less.