Provisional translation

Press Conference by Yoshimi Watanabe,Minister for Financial Services

(Excerpt)

July 1, 2008

[Opening Remarks by Minister Watanabe]

Good morning.

Today, all outstanding shares in Ashikaga Bank are being transferred from the Deposit Insurance Corporation to Ashikaga Holdings, marking the end of the special public management of the bank under the Deposit Insurance Act and representing its fresh start as an ordinary regional bank.

We hope that the Nomura-Next Group and Ashikaga Holdings Co., Ltd., in their capacity as shareholders of Ashikaga Bank, will ensure appropriate governance of the bank so that it can exercise its financial intermediary function in Tochigi Prefecture and surrounding areas on a sustainable and continuous basis.

The Financial Services Agency (FSA), for its part, will implement a follow-up review of the implementation of Ashikaga Bank's business plan and properly supervise Ashikaga Holdings as well as Ashikaga Bank in order to ensure that Ashikaga Bank continues to fully exercise its financial intermediary function in their local areas and maintains sound business operations.

Next, I will explain the status of initiatives regarding relationship banking. The FSA has been promoting initiatives regarding relationship banking since fiscal 2003. Today, we will publish a report on the status of relevant initiatives in fiscal 2007. Although I would like you to consult the FSA staff in charge of this matter for details, I will talk about two points.

First, what is notable about fiscal 2007 is that the business environment for small and medium-size enterprises (SMEs) has become very severe due to the recent surge in the prices of raw materials and the revision of the Building Code, among other factors. There were proactive, timely initiatives, such as developing loan products intended specifically for SMEs experiencing a temporary cash squeeze. We hope that financial institutions will make enhanced efforts to ensure smooth financing for SMEs by taking into consideration example cases of relationship banking initiatives that we are publishing today.

Meanwhile, I think that in addition to providing short-term funds, providing capital-like funds for long-term needs would also be an option. The small size of capital relative to liabilities is a structural problem of Japanese companies. This structural problem is particularly prominent in the case of SMEs. The structure of excess liabilities and undersized capital posed no problem in an era of inflation. However, in an era of deflation, when sales do not grow, or in an era when there are a number of cost-increasing factors like now, it brings about very unfavorable consequences. If a financial institution takes risk by providing capital-like funds to a company with the excess liabilities structure and gains a return commensurate with the risk, it would not only be good for the borrower but also help to boost the financial institution's profitability.

Amid the drastic changes in the social and economic conditions, I hope that financial institutions will change their mindset drastically and exercise their resourcefulness in order to provide high-quality services that precisely reflect users' needs. In times of drastic change like now, it is important to go on the offensive. I do not have any further statement to make.

[Questions and Answers]

Q.

First, I would like to ask you about appointments of senior FSA officials. You have been saying that you have no authority over personnel appointments. From your standpoint, how do you assess the personnel appointments made this time? Also, could you tell me about the challenges for the FSA in the new program year?

A.

I concurrently serve as the Minister for Financial Services and the minister in charge of the reform of the civil servant system. In the last Diet session, the basic act regarding a new civil servant system was enacted. Among the pillars of the basic act are plans to increase the mobility of human resources through a Japanese-style "revolving door" system and create a civil servant system that enables servants to work until the retirement age and - although this is a measure included in a legal revision made last year -abolishing the seniority-based personnel management system in favor of the merit-based system. I advised FSA Commissioner Sato that personnel appointments should be made with due consideration of the direction of the reform measures for the civil servant system. I advised him that encouragement of early retirement should be avoided as much as possible, since it represents a terminal form of the seniority-based system. On the other hand, as long as the seniority-based system remains in place, reshuffling personnel would become difficult without encouragement of early retirement. From this viewpoint, we can say that the personnel appointments this time have been made in a period of transition.

As for the 10th anniversary of the FSA's establishment, there are some areas in which we should have done better over the past years. One problem is the weakness of the FSA's research function. This undermines our capability of planning and designing (regulatory frameworks). I pointed out that personnel appointments should be made from the viewpoint of strengthening the research function and reflecting the achievements of the research division as well as the actual circumstances of regulatory activities in the planning and designing. I understand Commissioner Sato considered matters like this when he decided the appointments after consulting with the Prime Minister's Office.

Q.

Could you tell me again about the FSA's priority issues in the new program year?

A.

As I said in the previous press conference, it is important to implement the Better Market Initiative steadily. Also, the turmoil in the global capital market since the breakout of the subprime mortgage problem has not yet come to an end, so we must tackle this problem with an enhanced level of vigilance.

As I said earlier, amid the global crisis, Japan is the only country capable of going on the offensive, so I hope that Japanese financial institutions will actively pursue business growth by taking risks. The FSA will support such aggressive activities.

Q.

I would like to ask you about a final report concerning the proposed Japan Pension Organization, which was wrapped up yesterday. Could you tell me again how you evaluate this report and how the report's findings will be used?

A.

We have considered this issue from various viewpoints. The Social Insurance Agency has invited public distrust on a vast scale. Considering the fact that the distrust of this agency has led to the distrust of the pension system, we have concluded that it is an urgent task to disband the agency and revive it as a new entity called the Japan Pension Organization. This organization must establish a governance system, an internal control system and an audit system (compliance system). This is closely related to IT governance and upgrading of the IT system. It is important that the new organization makes sure to establish such systems properly. It is also necessary to establish a new organizational structure that exerts the kind of governance that is seen in the private sector by dismantling the existing organization that has become the worst example of the so-called triple-layered structure of the civil servant system. It is essential to introduce personnel management and salary systems that provide motivation to employees and establish a healthy management-labor relationship. It is important to improve services for the people through these measures. In-depth discussions have been held on the issue of outsourcing of operations, too. Also, the basic concept concerning employment has been formed after intense discussions. Actively recruiting people from the outside is essential for strengthening organizational governance, an issue that I mentioned at the beginning of the press conference. Meanwhile, as the problem of lost pension records occurred, we had to pay due consideration to this problem in relation to how the Japan Pension Organization should be organized and operated. Therefore, we arranged so that the council on the rehabilitation of pension-related operations and organizations would postpone the conclusion of its discussions by two months. This report represents the results of the hard work made under such circumstances.

Q.

My question concerns Shinginko Tokyo. A general shareholders' meeting yesterday approved a plan to strengthen the monitoring and supervision of the bank's management by the Tokyo Metropolitan Government through the appointment of former Lieutenant Tokyo Governor Otsuka for the new post of chairman, among other measures. Could you tell me how you view this move and how the FSA intends to deal with the bank?

A.

I would like to refrain from commenting on an individual bank's management. Generally speaking, it is very important that a major shareholder exercises governance to ensure appropriate management. As the Tokyo Metropolitan Government is a major shareholder of Shinginko Tokyo, I hope that it will exercise governance properly in that capacity.

Q.

You have been involved in the Ashikaga Bank issue for a long time. How do you feel as the bank has reached a turning point in the form of privatization?

A.

It has taken four and a half years (from nationalization to privatization), and Ashikaga Bank has been, so to speak, swimming with its hands tied during this period. Today, it is making a fresh start with its hands free. From now on, it can pursue a cutting-edge business model suited to a regional financial institution. Now that it has been rehabilitated, I hope that Ashikaga Bank will not shy away from taking risks as it is liberated from the constraints imposed during the nationalization. I think that the bank has learned a bitter lesson from its huge blunder in risk management before the nationalization, so I hope that the bank will engage in new financial services suited to the current circumstances, such as the initiative that I mentioned earlier.

Q.

I have another question about Ashikaga Bank. In relation to regional financing, you said earlier that SMEs have been severely squeezed by the surge in the prices of crude oil and raw materials. Ashikaga Bank is making a fresh start with an enhanced financial base just as other banks are struggling. How do you think this will affect regional banks?

A.

Ashikaga Bank used to have a large market share as a financial intermediary in the northern part of the Kanto region, Tochigi Prefecture, in particular. Its share has not changed drastically over the past four and a half years. Meanwhile, I understand that regional banks are rethinking their business strategies in order to survive in this era of fierce competition in the financial sector. Ashikaga Bank is making a fresh start just at a time when consolidation and realignment are ongoing and various pioneering, resourceful initiatives - the report we are releasing today includes examples of such initiatives - are proceeding. It is desirable that enhanced competition lead to the provision of better financial services in regions.

(End)