Press Conference by Kaoru Yosano, Minister of State for Economic and Fiscal Policy and Financial Services

(Excerpt)

February 6, 2006

Q.

A round-table meeting is to be held by experts over the issues on the stock exchanges today. Can you please once again describe the purpose of the meeting?

A.

Needless to say, the role fulfilled by the Tokyo Stock Exchange (TSE) is extremely important for the Japanese economy and for foreign investors. This makes the TSE vital infrastructure not only for the Japanese economy but also for the international financial market. It therefore goes without saying that the reliability of the TSE's system and various rules of the TSE must be world-class.

The meeting to be held by experts on these issues today is not aimed at scolding the TSE. Rather it has two objectives; the first is to make the TSE carefully listen to what has been discussed on the TSE, and the second objective is to give social support to reforms envisaged by the TSE itself.

Q.

On the problem concerning the Securities and Exchange Surveillance Commission (SESC), Chairman of the Policy Research Council Mr. Hidenao Nakagawa stated at a lecture over the weekend that the SESC should even be given various sanctioning or prosecution rights. What is your opinion on this?

A.

''Prosecution right'' is not a commonly-used legal term, so I cannot determine what Mr. Nakagawa has in mind without asking him about the specifics.

The commonly-used legal term is ''authority of prosecution''. Authority of prosecution exercised to enforce penal regulations is administrative authority unique to the public prosecutor's office. In that sense, if ''prosecution right'' refers to ''authority of prosecution'', it is unlikely that it will be given to the SESC.

I need to consult with SESC experts about this, but I think we must determine what other kinds of authorities are required and what the institutional or human obstacles are to conducting investigations after carefully listening to the opinions of those on the front line and reaching a consensus on what can be covered within the budgetary, institutional and staffing constraints.

Q.

Other than prosecution, the current procedures for administrative action involve the SESC making a recommendation and the Financial Services Agency (FSA) taking action. Some people are demanding that the SESC be given the right to take administrative action as well. The existing framework probably has its pros and cons-what is your view on this?

A.

The system is based on the idea that it is not desirable for the coach and the umpire to be the same, so even if the administrative body that recommends administrative action and the administrative body that actually takes administrative action are different organizations, there are no obstacles whatsoever. The FSA will never leave a case unaddressed by omission if there is a recommendation by the SESC, so I think the existing system is sufficient at this point.

Q.

In regards to the penal provisions of the Securities and Exchange Law, you said that studies are being conducted to enhance the penal provisions at the meeting of the Committee on Financial Affairs last Friday. How much have the studies progressed so far? How do you intend to enhance the penal provisions in specific terms? Also, do you intend to incorporate them into the Financial Instruments and Exchange Law?

A.

It might have been last week when Senior Vice-Minister for Foreign Affairs Mr. Yasuhisa Shiozaki visited me with a report he compiled as the head of the subcommittee of the Liberal Democratic Party's Policy Research Council. It was essentially about making the penal provisions much severer, by increasing a five-year imprisonment to a ten-year imprisonment. The orthodox approach in considering penal provisions is to strike a balance between criminal sentences, as always sought by the Ministry of Justice. A ten-year imprisonment is normally applicable only to so-called mala in se crimes. Ten-year imprisonment is perhaps not applicable to anyone who violated administrative laws or regulations. The Ministry of Justice's orthodox deems it balanced to apply ten-year imprisonment only in the case of mala in se.

However, I had a discussion with some directors of the Ministry of Justice the other day, and some junior members claimed that due to the current socioeconomic climate, it might be possible to override the theory of balanced punishment if it is really necessary to have penal provisions to prevent certain types of acts. I have told the staff at the FSA who are in charge of the relevant laws to hold preliminary discussions on the matter with the experts at the Criminal Affairs Bureau of the Ministry of Justice and expert such discussions have been initiated. As a matter of course, the discussions are about strengthening punishment.

Q.

Today's Cabinet meeting was held ahead of schedule in such an unusual way. What is your view on the Cabinet meeting being held ahead of schedule?

A.

It doesn't really matter whether a Cabinet meeting is held today or tomorrow. There is no problem in holding a Cabinet meeting ahead of schedule for the purpose of preparing the Ministers for tomorrow's Budget Committee meeting.

Q.

Today, Mr. Hidenao Nakagawa, Chairman of the Policy Research Council, asked questions about the relationship between the nominal growth rate and the interest rate. What do you think about this?

A.

I actually think the two should be considered separately from each other. On one hand, it is highly necessary that the Japanese economy itself has a strong desire to have high growth potential, and that the government, companies and the private sector make efforts and demonstrate wisdom to realize the high growth potential. I think it is meaningful to set a target that is just one step beyond reach rather than a grossly unrealistic target, in the context of setting a nonbinding target.

When pursuing fiscal rehabilitation, however, a more realistic and responsible stance to reform would be to rebuild government finances by making various assumptions on the safe side. If we achieve higher growth than expected, it deserves to be celebrated. Even if we start thinking about how we should capitalize on a windfall after actually experiencing such a windfall, it is not too late.

As for the relationship between the nominal growth rate and the interest rate, you may refer to the extremely academic discussions that have taken place at the recent meeting of the Council on Fiscal and Economic Policy.

Q.

Mr. Nakagawa probably asked questions today on N. G. Mankiw's theory that had been mentioned there. What is your view on this theory?

A.

Japan's postwar interest rate climate needs to be thoroughly understood with respect to each period. In the postwar era, for almost 20 years after Japan's surrender in World War II in 1945, the government initially implemented a controlled economy and later a quasi-controlled economy. There was actually no such thing as a long-term capital market, and it is fair to say that the lending rate of banks was also actually under the government's control. The government strove to keep the lending rate low.

On the other hand, financial institutions which could not tolerate low long-term interest rates were actually charging a high interest rate to borrowers based on a compensating balance system. There are studies which indicate that the interest rate during this period probably exceeded 10% when the compensating balance effects were excluded.

That is why Mr. Heizo Takenaka, Doctor of Economics and Minister for Internal Affairs and Communications and Minister of state for Privatization of the Postal Services, accepted to have the nominal growth rate and the long-term interest rate treated as the same, as an assumption of fiscal rehabilitation.

(End)