Provisional translation

Press Conference by Yoshimi Watanabe,Minister for Financial Service

(Excerpt)

July 4, 2008

[Opening Remarks by Minister Watanabe]

Good morning.

At today's cabinet meeting, we made decisions concerning three enforcement orders related to the basic act for the reform of the national civil servant system, including the order for the enforcement of the headquarters for the promotion of the reform of the national civil servant system. These orders provide for the establishment of the headquarters for the promotion of the reform of the national civil servant system on July 11 (Friday), the establishment of a council of advisers and a committee in charge of the study on the framework of labor-management relations under the headquarters, and the appointment of a deputy secretary-general, a councilor and director at the secretariat of the headquarters, as well as the designation of the Chief Cabinet Secretary, the State Minister in charge of the reform of the civil servant system and the Minister of Internal Affairs and Communications as deputy chiefs of the headquarters. For details, please consult the secretariat of the Administrative Reform Promotion Headquarters.

I have another matter to report to you. At an informal meeting of cabinet ministers, the Prime Minister called for efforts to thoroughly eliminate administrative waste. I will quote what he said: "Improvements have been made with regard to discretionary contracts, but further efforts must be made to promptly complete the review plan, which seeks to abolish discretionary contracts in principle. In addition, strict checks must be conducted on items for which general competitive bidding has already been introduced, so as to ensure effective competition. Regarding payments made to public-interest corporations, we need to eliminate wasteful spending by the government and incorporated administrative agencies, so there is still work remaining to be done. I would like to ask you to make increased efforts, taking the review results obtained today as the starting point. In this respect, we should aim for a 30% cut in payments to public-interest corporations. When making a budget request for fiscal 2009, I would like you to bear this target in mind and start reduction efforts under the fiscal 2008 budget wherever possible."

For its part, the FSA (Financial Services Agency) conducted intensive checks to identify any waste in payments to public-interest corporations with close relations with the administration. Although the FSA officials in charge of this matter will explain the details to you later, I will provide an outline. The checks were conducted on two corporations: the Financial Accounting Standards Foundation (FASF) and the Kinzai Institute for Financial Affairs.

As you know, the FASF is a foundation that incorporates the Accounting Standards Board of Japan, an organization responsible for setting Japan's accounting standards. In fiscal 2008, the FSA commissioned the FASF with work worth 73 million yen, concerning discussions at the International Accounting Standards Board and other forums, along with related clerical work. Until fiscal 2006, such work was commissioned through discretionary contracts, but it is now awarded through planning competition, according to explanations I have received. In fiscal 2008, additional measures to enhance efficiency and transparency are being considered.

The Kinzai Institute had previously been commissioned by the Ministry of Economy, Trade and Industry with work worth one million yen, related to Chinese language training courses for tax systems and fiscal legislation. However, in light of the results of the recent check, the institute decided not to undertake work from either the government or incorporated administrative agencies through non-competitive contracts in principle. When it has no option but to undertake such work, for some reason or other, it will do so on condition that it obtains a document from the government or other client organizations stating the reason for selecting it as the contractor and that the document be publicly released.

I do not have any further statements to make.

[Questions and Answers]

Q.

At the (G-8) summit meeting opening next week, global economic developments will be one of the focuses of attention. As there are a variety of causes for concern now, what do you hope for from the discussions at the summit meeting? A. As this is a summit, a meeting of leaders, I do not know whether it will discuss the kinds of detailed issues that are taken up at meetings of finance ministers or economic ministers. However, my guess is that active discussions will be held from the viewpoint that the surge in crude oil and food prices is closely related to the turmoil in the financial and capital markets. For its part, Japan faces a serious situation, too, as the surge in crude oil and food prices has resulted in a deterioration in its terms of trade, causing trade losses equivalent to around 10% of consumption tax revenue. As this is a summit meeting, this issue will be discussed not only from the viewpoint of the domestic circumstances of individual countries, but also from a global perspective. As downside risks for the global economy are becoming increasingly evident, I hope that fruitful discussions will be held at this summit meeting.

In light of the continued stock price drop in recent days, what is your assessment of the condition of the Japanese economy?

A.

I will not comment on market developments. The risk of a slowdown in the U.S. economy has apparently taken the shine off the theory of "decoupling." As was pointed out at the recent Asian Davos meeting (World Economic Forum on East Asia), I believe that countries that have relied on exports for economic growth and recovery must be prepared to receive substantial damage. We must recognize that structural reform toward a domestic demand-led economy, which has been advocated in Japan for nearly 30 years, has not lost its appeal but rather is becoming increasingly necessary.

Q.

I would like to ask you about the management of pension assets. According to a media report, the GPIF (Government Pension Investment Fund) has slipped into the red, and a study group of the LDP (Liberal Democratic Party) concluded debate on SWFs (sovereign wealth funds) yesterday. What are your thoughts about the management of pension funds?

A.

The Financial Markets Strategy Team, my advisory group, discussed this issue, too. As this group's second report shows, there is a widespread view that Japan should strive to manage pension assets in ways that bring more benefits, and aim for more efficient management. The LDP's National Vision Project Headquarters has proposed the establishment of an SWF-like organization, while some also argue that the GPIF should be abolished so that people can directly decide how pension assets should be invested. In any case, as pension reserves are assets of the people, there should be active debate to find a satisfactory method of asset management.

Q.

The European Central Bank (ECB) has carried out an interest rate hike, citing concerns about inflation as its reason for doing so. I think that now that the authorities have started to take specific action regarding inflation, we are witnessing a new stage, beyond the subprime mortgage problem and the crude oil price surge. Although you may have already talked about this, could you tell me again about how you view the condition of the global economy?

A.

While I do not know whether or not the ECB will implement further interest hikes, I believe that hikes intended to curb inflation, if taken too far, could have the opposite effect to what is intended. In short, there will be a tipping point where interest rate hikes not only slow down inflation but also stifle economic growth or aggravate market turmoil. Some people call it a "destruction point." Given the downside risks for the global economy, I think that monetary policy management is very tricky.

At the Davos (World Economic Forum) meeting in January, IMF (International Monetary Fund) Managing Director Strauss-Kahn said that countries with room to take fiscal measures should do so. This unusual call for fiscal measures by the IMF made headlines, and it was apparently a symbolic indication of the extraordinary situation of the global economy.

Given that there is concern about inflation and that the surge in crude oil and food prices is posing a serious problem for resource-poor nations, Japan cannot afford to be indifferent. We must consider how to deal with this fundamental problem and why the flow of money is changing like this. What we should do first and foremost is to find out what the root cause of the turmoil in the financial and capital markets is. We must face up to the fact that this turmoil has triggered an influx of funds into the commodities market. If we are to apply the lessons Japan has learned, we should first seek to provide a fundamental solution to the turmoil in the financial and capital markets.

Q.

As Europe has gone it alone in carrying out an interest rate hike, there is concern about the widening interest rate gap between Europe and the United States and between Europe and Japan. What are your thoughts in this regard?

A.

The interest rate gap is certain to widen if only one side carries out an interest rate hike. However, I understand that the market has shown a contrarian response. In any case, as I said earlier, we must bear in mind that raising interest rates is a very tricky measure, in that it can produce the opposite effects to what is intended if taken too far.

Q.

Today, non-life insurance companies are scheduled to announce the results of their investigations into the overcharging of fire insurance premiums. How does the FSA intend to act in the future, following the announcement of the results?

A.

As I have not heard about the announcement, I would like to follow up on this issue after the announcement.

Q.

Yesterday, there was an announcement regarding the life insurance issue (nonpayment of insurance benefits), and life insurance companies pledged to follow up on this issue properly. However, the companies may be hoping to use the administrative action taken this time as an opportunity to close the chapter on this issue. What are your views in this respect?

A.

The important thing is to prevent the recurrence of problems like this. Insurance companies must make sure to avoid putting customers in outrageous situations.

Q.

Next week, Bank of Tokyo-Mitsubishi UFJ's computer systems are scheduled to be fully integrated. In the first stage of the integration process in May, a system problem occurred. What do you think about the full integration of systems this time, and how will the FSA monitor the situation? Will it take any special precautionary steps?

A.

I was very disappointed about the problem that occurred after the previous integration work. I hope that the bank will prevent problems like this from happening. As the integration process will not be finished this time, we will keep a close watch until the work is completed．

(End)