Provisional translation

Press Conference by Yoshimi Watanabe,Minister for Financial Services

(Excerpt)

July 22, 2008

[Opening Remarks by Minister Watanabe]

I will talk about a study group on labor-management relations that will be established at the headquarters for the promotion of the reform of the national civil servant system. This group, which has a so-called tripartite structure, will investigate and deliberate on issues related to basic labor rights. Group members representing the labor side will be appointed by the Prime Minister from among candidates nominated by the labor organizations of national and local civil servants. A relevant notice has been posted on the Web site of the headquarters, and nominations from such organizations will be accepted until Friday, July 25. For details, please consult the headquarters for the promotion of the reform of the national civil servant system. I do not have any further statements to make.

[Questions and Answers]

Q.

Most major U.S. financial institutions have announced their financial results for the second quarter. One financial institution after another has booked huge losses due to the impact of the subprime mortgage problem. How do you assess this situation?

A.

Some of them announced results that were in line with expectations, while others apparently suffered bigger-than-expected losses. Generally speaking, it is important that unfavorable data like these be disclosed accurately so as to avoid fueling a sense of anxiety and uncertainty. Japan experienced a similar problem more than a decade ago, so the lessons it has learned should be used as a reference source, as I always say. The financial results of these LCFI (large and complex financial institutions) will in no way shake the foundation of Japan's financial system, yet we will deal with the subprime mortgage problem with an increased level of vigilance.

Q.

One week ago, the issue of a management crisis at U.S. mortgage finance companies Freddie Mac and Fannie Mae emerged, and I hear that the FSA (Financial Services Agency) has started investigations in to what extent Japanese financial institutions are exposed to bonds issued by the two companies. Could you tell me about the progress or the results of the investigation?

A.

Regarding this matter, GSE (government-sponsored agency) bonds have been issued on a very large scale. As you know, GSE bonds include agency bonds and mortgage-backed securities. The necessary thing to do is to clarify their full scale. Holding such securities is not in itself inappropriate. I understand that if the stock prices (of Freddie Mac and Fannie Mae) drop, the U.S. government may take measures to strengthen their capital bases depending on the circumstances, as Treasury Secretary Paulson has announced. Therefore, it is a globally accepted view that their bonds are properly protected, so we may rest assured in this respect. In any case, it is necessary to identify the amount of holdings of such securities.

Q.

Regarding this matter, a media report said that when you talked with a senior U.S. government official on July 16, you expressed your concern about the management crisis at the two U.S. mortgage finance companies and said in effect that you would not only prevent the sale of GSE bonds held by the government but also ask private financial institutions not to sell their holdings. Is this report correct? Also, do your reported remarks indicate an intention of the authorities to give administrative guidance regarding the sales of such bonds?

A.

First of all, I am quite surprised at this media report. As I did not talk on the record about this issue, I would neither deny nor confirm what has been reported. That said, we have been engaged in brainstorming about various issues related to this matter at the Financial Markets Strategy Team, as I have repeatedly told you. If we sell GSE bonds, which have been issued on a vast scale, amid the prevailing sense of anxiety and uncertainty, it would be like committing suicide. So, as I said earlier, it is important that the U.S. government take appropriate steps. Shareholders would naturally suffer the dilution of the value of their shareholdings if the stock prices fall or additional capital is injected. Meanwhile, regarding bonds, there are expectations in the market that the U.S. government will take appropriate steps, as indicated by the yield spread over the U.S. Treasury securities, so it is important that the U.S. government take appropriate steps. Therefore, we have no intention to issue instructions to private financial institutions regarding the sale of GSE bonds.

Q.

According to the same media report, you indicated your idea that the Japanese government should use part of its foreign currency reserves for the bailout of these mortgage finance companies if the U.S. government needs such assistance. Do you really have such an idea and how would it be discussed within the government?

A.

I will not comment on this media report. However, the Financial Markets Strategy Team has engaged in brainstorming regarding various issues, including how to make use of the special foreign exchange account. A proposal for a debt-to-equity swap using foreign currency reserves was also discussed in the brainstorming sessions.

Q.

I will ask you about a cabinet reshuffle. There are growing calls from within the ruling parties for a cabinet reshuffle in order to stress the policy distinctiveness of Prime Minister Fukuda by replacing the incumbent cabinet, most of whose members have been retained from the previous Abe cabinet. What is your view on this?

A.

It is up to the Prime Minister to make a decision, so I would like to refrain from making comments.

Q.

Earlier today, a system problem that hit the Tokyo Stock Exchange's futures market was announced. Have you received any report regarding this? Also, what action will the FSA take?

A.

I have received a report that a problem occurred in the derivatives trading system. The system stopped operating at 9:21 a.m. According to the report, trading in the TOPIX futures, securities options and government bond options has been suspended. As cash trading and off-floor trading are continuing, the bulk of the exchange's transactions has not been affected. The problem has affected derivatives trading. A similar problem occurred in January, so it is necessary to properly examine and identify the cause. Of course, it is also important to make exhaustive efforts to prevent the recurrence of problems like this.

Q.

You said that you will not comment on a cabinet reshuffle. But should a cabinet reshuffle be carried out, do you think the approval rating would rise? Also, do you think that the people feel the need for a cabinet reshuffle?

A.

I would like you to ask Prime Minister Fukuda about this. Anyway, I am sure that he is in no way conducting politics for the sake of the approval rating. The Fukuda cabinet is implementing policy measures pledged by the Prime Minister in his policy speech and dealing with various issues as they arise day to day, and linking a decision on a cabinet reshuffle to political calculations over the approval rating would be inappropriate. I suppose that the Prime Minister is not thinking of doing such a thing.

Q.

Since last week, there have been media reports about improper use of company-owned cars by Mizuho Corporate Bank President Saito. What do you think of this matter?

A.

I would like to refrain from commenting on a matter not related to financial regulation. Generally speaking, it is important that people covered by news media, including us politicians, maintain an appropriate decorum when socializing with media people.

(End)