Provisional translation

Press Conference by Yoshimi Watanabe,Minister for Financial Services

(Excerpt)

July 29, 2008

[Opening Remarks by Minister Watanabe]

I will talk about the "hotline for consultations about smooth financing."

We have established the hotline in order to collect the opinions of small- and medium-size enterprises and gather information about their problems through telephone conversations, so that we can continuously and meticulously keep track of the actual state of financing for small and medium-size enterprises. As indicated in the reference material distributed to you, the phone number of the hot line, which is open from 10 a.m. to 4 p.m., is 03-5251-7755. The information provided through the hot line is utilized in our inspection and supervision. For example, based on such information, we may hold hearings with financial institutions if the information provider agrees to it. I would like to ask small- and medium-size enterprises to actively provide us with information through this hot line. The FSA (Financial Services Agency) will continue to watch the state of financial institutions' provision of loans without lowering our level of vigilance. For details, please consult the Supervisory Coordination Division of the Supervisory Bureau.

I do not have any further statements to make.

[Questions and Answers]

Q.

First, I will ask you about the hotline that you spoke of. Recently, there has been a series of failures and other problems in the real estate and construction industries, and speculation is emerging again that this situation may have resulted from stringent inspection and supervision and the ensuing moves by banks to withdraw outstanding loans and refuse to provide new loans. What do you think of such speculation?

A.

As I always say, the FSA never instructs financial institutions to curb loans to the real estate industry, for example. If there is a case in which a financial institution is intentionally curbing loans to a particular industry - well that is exactly the kind of information that should be reported to us through this hotline.

Q.

Next, I will ask you about the budget request guidelines for the next fiscal year, which have been set recently. Ahead of a general election, which may be held next year - or I don't know when - and amid the rising prices of crude oil and foods, there is strong pressure for an increase in budget expenditures from within the ruling parties. In light of this situation, with what kind of stance do you, as a cabinet member, intend to work on the compilation of the budget?

A.

Regarding the compilation of the budget, a kind of ceiling has been set for the years through 2011 under the Basic Policies for 2006. I do not expect that the Fukuda Cabinet will deviate from this policy line. Meanwhile, downside risks for the economy are rapidly growing, so we will need to conduct macroeconomic policy management properly. Macroeconomic policies refer to monetary, exchange and fiscal policies. We will need to manage fiscal policy flexibly while considering which of the three policies we can resort to.

Q.

Next, I will ask you about the IMF's (International Monetary Fund) latest financial stability report. In the report, the IMF points out a variety of matters, such as that the global financial markets continue to be fragile and that signs of systemic risk remain strong, while expressing strong concern over the soundness of banks' balance sheets. In light of these matters, could you tell me how you view the condition of the global financial markets as well as Japan's markets and the soundness of financial institutions?

A.

Although I have not yet read the IMF report in detail, it apparently offers a very severe assessment. For example, the IMF has retained its previous estimate that subprime-related losses incurred by financial institutions around the world could amount to a maximum of $945 billion. It also points out that although U.S. and European banks have raised additional capital, the amount of disclosed losses has exceeded the amount of the additional capital raised. Banks face difficulties in maintaining earnings due to falling credit quality. Consequently, bank share prices have fallen sharply and credit default risk has risen. Market prices of asset-backed securities and the delinquency rate provide little reason for changing the estimates of the losses published in the April report, which I spoke of earlier. This is what the latest report says. As Japan's financial regulators, we will watch future developments with heightened vigilance.

Q.

Regarding a shift to an electronic share certificate system, which is scheduled to be implemented in January next year, it has been increasingly warned that some securities companies are lagging behind in preparing for the shift, fueling concerns that preparations may not be completed in time and that problems may occur. How does the FSA view the current situation?

A.

The schedule for the shift was decided several years ago. Although some small- and medium-size securities companies have not completed preparations, there is still time left. So I would like them to make appropriate preparations with a deadline in mind. As this is basically a shift to a paperless system, it is none other than an IT issue. Therefore, the important thing is how to build an IT system. If they find it difficult to build an in-house system, there are various options available, and I would like them to prepare for the shift properly, by using a joint system.

Q.

A bill for the bailout of the U.S. GSEs (government-sponsored enterprises) has passed the Senate and is expected to be enacted. I would like to ask you again how you view this bill. Also, in relation to the U.S. financial market, you referred to the injection of public funds. Do you think that an additional injection of public funds will be necessary?

A.

I think that it is very good that the U.S. Congress has passed a bill related to the support for Fannie Mae and Freddie Mac. In Japan, there was an uproar in the Diet when the support for the "jusen" housing loan companies was under deliberation, and the way in which public funds were used drew severe public criticism. I hope that an appropriate support framework will be established in light of Japan's lesson. It is not clear at this time how much capital shortfall will arise. According to the Basel II standard, for example, a risk weight of 35% is applied to residential mortgages, and 35% of the 8% capital would translate into around 2.75%. A private-sector institution would be required to have sufficient capital to also cover off-balance assets. As it is not clear how much the asset quality has deteriorated, the precise amount of necessary capital is still unknown. Meanwhile, GSE bonds are different from capital, and investors around the world purchased the bonds as they counted on the backing of the U.S. government. Therefore, as I always say, I would like the U.S. government to deal with this issue in an appropriate manner.

Q.

Regarding the "plan for ensuring a sense of safety" - although this is not an issue for which you are directly responsible for - what did the Prime Minister and the cabinet ministers concerned say?

A.

We spent much time on discussion about this plan at the cabinet meeting. I will quote a statement made by the Prime Minister: "The source of trust in the state and society is a sense of safety. In light of the people's concern about and dissatisfaction with the current status of social security, it is necessary to quickly carry out meticulously-thought-out measures that foster a sense of safety and reflect the people's viewpoints. This five-point plan and initiatives toward realizing a society that enables elderly people to maintain good health and continue working are emergency measures, so we will draw up a timetable with a view to implementing them within one or two years. In particular, we will review all administrative operations and aim to provide easy-to-understand and reliable administrative services that reflect the viewpoints of the people, with due consideration of the fact that distrust in and concern about social security have arisen because of various issues related to our health and labor policies. These issues include, specifically: the problem of forced closures of obstetric and pediatric clinics mainly due to a shortage of doctors; the difficulty of finding hospitals willing to accept emergency patients; the need to promote the new "No Child Left Waiting to Enter Kindergarten" plan, which includes drastic reforms aiming to sharply increase the number of designated kindergartens (totaling only 229 as of April this year); and the problem of non-regular workers - there are a number of young people who wish to become regular workers but who are being forced to engage in unstable jobs, such as part-time jobs and temporary jobs. We will immediately start implementing necessary measures regarding tasks that require urgent action. In addition, I would like to request you cabinet ministers to follow up on the implementation of the five-point plan for ensuring a sense of safety. As the entire cabinet aims to ensure the safety and security of the people, I would like the relevant cabinet ministers to cooperate with each other in implementing necessary measures." This was the Prime Minister's statement. Accordingly, we will quickly start implementing measures regarding social security system-related issues that require urgent action.

Q.

Did you not make any remark regarding this matter?

A.

I did not make any remark. However, regarding FSA-related matters, our requests concerning the tax system - they are pending issues - are mentioned as part of the review of the defined-contribution pension scheme. The requests mentioned are an increase in the ceiling on the defined contribution amount, the introduction of premium contributions by employees and provision of matching funds under the Japanese version of the defined-contribution pension scheme, and an expansion of the scope of people eligible to participate in individual-type defined-contribution pension plans.

(End)