Press Conference by Yoshimi Watanabe,Minister for Financial Services
June 27, 2008
[Opening Remarks by Minister Watanabe]
The FSA (Financial Services Agency) has been engaged in reforming the financial and capital markets since it published the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets late last year. We have made substantial progress, as represented by the revision of the Financial Instruments and Exchange Act in the previous Diet session, for example. So, we have decided to compile and publish a report on the progress made up until June. The report covers the issue of eliminating the so-called PE (permanent establishment) risk (referring to the risk that a foreign investment fund, for example, may be deemed to have a permanent establishment related to a specific investment activity for taxation purposes), which we have compiled a collection of reference cases about.
Strengthening the competitiveness of the financial and capital markets is a very important task for Japan, and the FSA will continue to do its utmost to establish an attractive market that will draw funds, information and human resources from around the world.
As for the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets, the name is too long and a bit of a mouthful, so we would like to call it the “Better Market Initiative” from now on and make efforts to enhance awareness about it overseas. For details, please consult the FSA staff responsible for this matter.
If the so-called PE risk is eliminated, it will be a very welcome development for investment funds.
That is all I have to report to you.
[Questions and Answers]
Regarding a report on the progress of the Better Market Initiative that will be published today, what is your assessment of the current situation? Also, what specific measures - I understand that this is a taxation issue - are included in the report regarding the elimination of the PE risk?
For the Better Market Initiative, the diversification of ETFs (Exchange Traded Funds) to allow trading of ETFs investing in commodity futures will be implemented by December 12 this year. This date is not the implementation date but the deadline. We aim to implement it before that date. The same goes for the establishment of a market intended exclusively for investment professionals, as well as an increase in the administrative civil monetary penalty and an expansion of the scope of offenses subject to that penalty.
Also, regarding the mutual entry of financial instruments exchanges and commodity exchanges into each other's fields - although this is not related to the latest legal revision - we aim to conclude our deliberations by the end of this year and achieve it quickly thereafter.
In addition, we are continuing efforts regarding the convergence of Japanese accounting standards toward international standards and the strengthening of cooperation with foreign authorities, so as to ensure XBRL (eXtensible Business Reporting Language) compatibility.
As for the review of firewall regulations and the improvement of systems to manage conflicts of interests, which are covered by the legal revision, we will implement them by June 12 next year at the latest.
An expansion of the scope of business for banking and insurance groups will be implemented by December 12 this year at the latest.
In relation to the initiative toward better regulation, we will continue to strengthen cooperation with foreign authorities. We started an English-language mail service in January this year, conducted a questionnaire survey with financial institutions in March and published the principles of the financial services industry in April. The progress in the initiative toward better regulation was published in May, as you know. We will continue to strive to ensure that all employees of the FSA and Local Finance Bureaus understand the importance of the initiatives and measures I have mentioned. In addition, we will make constant efforts to enhance dialogue with financial institutions and strengthen the dissemination of information.
In relation to the improvement of market infrastructure, we published the basic concept concerning how to foster and retain financial experts in April. We will compile a report on this matter around this summer, based on the public comments collected, after which we will start designing the system. Regarding the plan to strengthen Tokyo's function as an international financial center, the integrated headquarters for regional revitalization held a meeting in April. We will establish an international financial center forum in order to steadily implement the plan and make the necessary follow-ups. As I said, some measures have already begun and others have not. In any case, we are steadily implementing the plan to strengthen the markets.
As for eliminating the PE risk, it has been argued that foreign investors face this risk when they make investments through fund managers based in Japan. The risk may, the argument goes, have prompted foreign investors to avoid employing Japanese fund managers for investments in Japan or induced Japanese fund managers to move abroad. In light of this argument, the FSA, together with the tax authorities, compiled a collection of reference cases that make it clear which cases are subject to taxation and which are not. The collection will be published today, and will promote the activities of fund managers in Japan. We also expect that it will help to attract foreign fund managers to move to Japan. For details, please consult the FSA staff in charge of this matter.
As the new program year starts next Tuesday, could you tell me about your assessment of the achievements of the current program year and the tasks that will be tackled in the new program year in relation to the FSA's activities, the reform of the national civil servant system and administrative reform, although you may have already partly answered this question?
For the FSA's activities, as I said earlier, the Better Market Initiative is being steadily implemented, and will be firmly established following the revision of the Financial Instruments and Exchange Act. I think that this is a significant achievement. Also, the Financial Markets Strategy Team was launched as my advisory group after the emergence of the subprime mortgage problem last year, and has issued two reports. With regard to the recommendations included in the first report, the guidelines for supervision were revised so as to ensure traceability (of the underlying assets of securitized products). Also, as recommended in a report by the Financial Stability Forum, Japan has already adopted the leading disclosure practices, ahead of other countries. Japanese financial institutions have received relatively limited damage amid the instability of the global financial and capital markets, and the country has a chance to go on the offensive after implementing these various measures. In short, Japan is now better prepared to turn adversity into opportunity, as I predicted when I became minister last year. Looking back at the past year, I feel it is necessary to enhance our stance of turning adversity into opportunity.
Meanwhile, regarding administrative reform, we have wrapped up the second, bigger reform package, following last year's package, which included the establishment of the secretariat of the headquarters for the promotion of administrative reform and the adoption of the framework plan for reforming the civil servant system. As you know, we have enacted the basic act for the reform of the national civil servant system. This enactment, together with the amendment (of the government bill), represented an epoch-making achievement in the history of constitutional government. The important part is fleshing out the details, so we must carefully consider these in order to prevent the new act from being watered down.
In relation to the details regarding the civil servant system that you mentioned, could you tell me about the progress in selecting the secretary-general of the headquarters (for the reform of the national civil servant system)?
As I said at my previous press conference, there will be no public invitation, and the Prime Minister will make the final decision. The Prime Minister has made it clear that he will not allow the traditional method of bureaucracy-led appointment, assembling a scratch team of members from various government organizations - not only for the secretary-general, but also for the deputy secretary-general and other staff members. He also intends to consult with me as the minister in charge of this matter, so I believe that the traditional method of making appointments through collegial arrangements will be gone. The Prime Minister is thinking it over at the moment.
Media reports have mentioned Mr. Seike, a Keio University professor, as a possible candidate. Have you heard about this?
As the Prime Minister has the final say, I am awaiting his decision.
In relation to the Better Market Initiative, I understand that a study on the issue of the mutual entry of financial instruments exchanges and commodity exchanges into each other's fields will start from now, while negotiations are underway between the Ministry of Economy, Trade and Industry and the Ministry of Agriculture, Forestry and Fisheries. Have you received a report about the current situation?
I would like you to consult FSA staff about the current situation.
The plan to allow the mutual entry of financial instruments exchanges and commodity exchanges into each other's fields has been prompted by concerns that if the Japanese financial sector remains compartmentalized, the management of Japanese household financial assets will fail to keep pace with global trends. It would be very unfortunate for people if their financial assets failed to grow due to the problem of compartmentalized administration, so we have been proceeding based on our decision to resolve this problem. I intend to reach a conclusion on this matter quickly.
Regarding the secretary-general of the headquarters for the promotion of the civil servant system, there are media reports that the post may be assigned on a non-permanent basis. What are your views on this?
Of course, if someone from the private sector is appointed, it could be difficult for them to serve on a permanent basis. Therefore, we should not rule out the option of a non-permanent appointment. For example, at the council for decentralization reform - I am not sure about its formal name - Mr. Miyawaki serves on a non-permanent basis, if I remember correctly. As there are cases like this, the important thing is to appoint a person suited to the purpose of the reform - namely shifting from a bureaucracy-led system to a politics-led one, giving the Cabinet integrated control over senior ministry officials, abolishing the so-called career system and eliminating ministerial sectionalism.
Debate at the council on the rehabilitation of pension-related operations and organization is apparently close to reaching a conclusion. The debate has lasted for a very long time. As the minister in charge, how do you feel as you look back at the long-running debate, which concerns various issues such as unauthorized engagement in full-time labor union posts and job reduction?
More than a year has been spent on the debate. Unfortunately, the organization of the Social Insurance Agency has been revealed as the worst example of the civil servant system, and we will disband the agency based on this recognition. As we plan to establish the Japan Pension Organization in its place, it is necessary to radically reform the organizational framework that failed to institute proper governance at the agency.
A private sector insurance company would suffer serious consequences if a problem like non-payment of benefits came to light. Such a problem actually occurred at life and non-life insurance companies, and they have been forced to review and improve their business operations. In light of this, as the government takes responsibility for insurance in place of the private sector (under the social security system), we are trying to wrap up our final report on radical reform at the meetings today and next week. At today's meeting, discussions will be held on such pending issues.
Some people say that the earnestness about investigating into the problem of non-payments of benefits varies from company to company. I understand that the FSA has been assessing the results of the final reports submitted last year (by insurance companies). What are your views on this?
First of all, voluntary efforts by individual companies are important. We are carefully watching the efforts they are making based on their reviews. As individual companies have identified and strived to resolve their own problems, we will strictly follow up on these activities.
Regarding personnel appointments at the FSA, could you tell me about the scheduling concerning informal notifications and announcements?
Unfortunately, I do not have any authority over personnel management. Ministers of state in charge of specially designated affairs like me do not have authority over personnel management. At the FSA, which is attached to the Cabinet Office, this authority is delegated by the Prime Minister to the FSA Commissioner, so I would like to refrain from making any comment.
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