Press Conference by Yuji Yamamoto, Minister for Financial Services

(Excerpt)

January 30, 2007

Q.

Yesterday, the Securities and Exchange Surveillance Commission (SESC) recommended that the Financial Services Agency (FSA) take administrative action against Mitsubishi UFJ Securities. Administrative action has been taken against securities companies one after another, including Daiwa Securities and Nikko Cordial Corporation last year. What are your thoughts on the state of securities companies, which are vital to the market?

A.

Securities companies serve as the link between investors and the market as the market intermediary, so their relationship of trust must be solid. They are also given the mission of facilitating the financing of issuing bodies. In that sense, they have the mission to ensure market transparency and credibility. Market liquidity improves through proprietary trading, and mergers and acquisitions (M&A) have become a trend nowadays. As they play such diverse roles, they are important to the national economy. In that context, it is hoped that these companies will undertake further efforts to comply with laws and regulations and to ensure confidence in the markets and among investors.

Q.

At the G7 meeting to be held in Germany next month, Germany seems to be inclined to put hedge fund regulations on the agenda, while the United States and Britain seem to be taking a different position. What is the likelihood of hedge fund regulations being put on the agenda at the meeting? Also, please describe your interest in hedge funds and your views on the enhancement of the aforementioned regulations.

A.

I believe that the G7 nations do not vary in their recognition that the global activity of funds is becoming massive and their influence over economies and international financial systems is steadily growing. If that is the case, the most important thing is to be able to sustain the international financial framework by lowering systemic risks by first ensuring financial and managerial soundness at financial institutions, especially banks, regardless of what the funds are doing. In that sense, the United States and other countries are looking into a registration system for hedge funds, by distinguishing between hedge funds and private equity funds, while largely assuming free activities. However, the rating of fund-of-funds is currently being considered under Basel II in ensuring the soundness of banks as just mentioned, and the transparency and rating of funds are not necessarily unrelated in view of the aforementioned systemic risks, so in that sense, the approach to hedge funds needs to be discussed from here onwards as a matter of course, whether in relation to the United States, the United Kingdom or Germany.

Q.

In regards to securities companies, Nomura Securities and Daiwa Securities announced their quarterly financial results yesterday, which turned out to be a fall in profits. Some people have pointed out that Japanese securities companies' profitability, that is, their return on equity (ROE), is much lower than their western counterparts. What is your view on their competitiveness?

A.

The new role of securities companies - which is to secure profits by aggressively risking money beyond the scope of so-called financial intermediary functions of securities companies - tends to carry more weight than their core operations nowadays, regardless whether they are long- or short-term investments. In that sense, Japanese securities companies will eventually go in that direction, and I think they are at the stage of allocating their responses to exploring that field.

Q.

Newspapers have reported that the FSA has started looking into taking administrative action against the Bank of Tokyo-Mitsubishi UFJ in relation to its dubious, nontransparent loans. While acknowledging that it has been revealed in public trial, what is your evaluation of its relationship with Asuka-kai, and how will the FSA deal with this?

A.

If I may comment on this in general terms, it is important that financial institutions develop and build an adequate compliance system so that they do not invite criticism from the general public, considering their public nature. The FSA expects financial institutions to develop and build such systems and thereby further boost confidence in Japanese financial institutions and Japan's financial system, and therefore intends to respond appropriately from such perspective. We will keep a close eye on the matter by taking all factors into consideration, including addressing the issue of governance, while getting a detailed account of the situation, bearing in mind that it is a past event and involved the other party to the merger.

(End)

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